IMF Article 4

IMF Country Report No.
22/126
MALAYSIA
2022 ARTICLE IV CONSULTATION—PRESS RELEASE;
April 2022 STAFF REPORT; AND STATEMENT BY THE EXECUTIVE
DIRECTOR FOR MALAYSIA
Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions
with members, usually every year. In the context of the 2022 Article IV consultation with
Malaysia, the following documents have been released and are included in this package:
• A Press Release summarizing the views of the Executive Board as expressed during its
April 6, 2022 consideration of the staff report that concluded the Article IV
consultation with Malaysia.
• The Staff Report prepared by a staff team of the IMF for the Executive Board’s
consideration on April 6, 2022, following discussions that ended on February 9, 2022,
with the officials of Malaysia on economic developments and policies. Based on
information available at the time of these discussions, the staff report was completed
on March 7, 2022.
• An Informational Annex prepared by the IMF staff.
• A Staff Statement updating information on recent developments.
• A Statement by the Executive Director for Malaysia.
The IMF’s transparency policy allows for the deletion of market-sensitive information and
premature disclosure of the authorities’ policy intentions in published staff reports and
other documents.
Copies of this report are available to the public from
International Monetary Fund • Publication Services

PO Box 92780 • Washington, D.C. 20090
Telephone: (202) 623-7430 • Fax: (202) 623-7201
E-mail: publications@imf.org Web: http://www.imf.org
Price: $18.00 per printed copy
International Monetary Fund

Washington, D.C.
© 2022 International Monetary Fund

PR22/134
IMF Executive Board Concludes 2022 Article IV Consultation

with Malaysia
FOR IMMEDIATE RELEASE
Washington, DC – April 28, 2022: On April 6, 2022, the Executive Board of the International
Monetary Fund (IMF) concluded the Article IV consultation1 with Malaysia.
The recovery is strengthening but remains uneven. The severe Delta outbreak in the middle of
2021 prompted strict nationwide measures, which limited real GDP growth to about 3 percent,
while inflation was contained at about 2½ percent (Table 1). The export-oriented
manufacturing sector, which remained operative during shutdowns, underpinned growth, while
the agricultural sector struggled with prolonged labor shortages due to a lower flow of migrant
workers. Contact-intensive sectors, including tourism, were hard-hit.
A swift, substantial, and multi-pronged pandemic policy response supported the economy.
Total COVID-related budget spending amounted to RM39 billion (about 2½ percent of GDP) in
2021, more than double the initially budgeted RM17 billion, and above the RM38 billion spent
in 2020. As a result, the federal government deficit reached about 6½ percent of GDP in 2021,
higher than the about 5½ deficit foreseen in the 2021 Budget. Federal government debt is
estimated at 63 percent of GDP, below the domestic debt ceiling of 65 percent of GDP. BNM
maintained an accommodative monetary policy stance, with its overnight policy rate
unchanged at a record low of 1¾ percent through early 2022.
Growth is projected to be solid in the medium term, although risks of long-term economic
scarring are real. Growth in 2022 is projected at about 5¾ percent driven by pent-up domestic
demand against the backdrop of high vaccination rates and limited movement restrictions, as
well as continued strong external demand. However, the pandemic could lead to permanent
GDP losses and a drag on potential output. Inflation is projected to stabilize at about 2½
percent despite transitory supply-chain challenges. The current account surplus is expected to
narrow gradually over the medium term, as consumption and capital-related imports recover,
despite a gradual pick up in foreign tourism flows as the economy reopens.
Executive Board Assessment2
Executive Directors welcomed the gradual economic recovery supported by impressive

vaccine rollout and swift and multi-pronged policy support. At the same time, Directors noted
that the recovery remains uneven, with substantial downside risks, including from the ongoing
pandemic and the war in Ukraine. In this context, Directors called on the authorities to
calibrate macroeconomic policies to the pace of the recovery, with continued targeted policy
1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff
team visits the country, collects economic and financial information, and discusses with officials the country's economic developments
and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.
2 At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors,
and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here:
http://www.IMF.org/external/np/sec/misc/qualifiers.htm.
support in the near term, while preserving policy space to respond to downside risks and
accelerating structural reforms.
Directors called for continued targeted fiscal support focused on the vulnerable and hard-hit
sectors as the output gap continues to close, followed by gradual fiscal consolidation. They
welcomed in this regard the authorities’ commitment to fiscal sustainability backed by a
medium-term revenue strategy and the Fiscal Responsibility Act.
Directors welcomed the accommodative monetary policy stance, as inflation expectations are
well anchored and there is still slack in the economy. They agreed that monetary policy should
remain data dependent and welcomed the authorities’ joint work with the Fund on the
operationalization of the integrated policy framework (IPF). Directors noted that the authorities’
commitment to exchange rate flexibility will continue to serve the country well. They
encouraged continued progress in addressing underlying vulnerabilities with a view to phasing
out capital flow measures as market conditions allow.
Directors noted that the financial sector remains resilient. They welcomed the authorities’
judicious unwinding of forbearance measures and their progressively more targeted approach
to financial support measures. Director were also encouraged by financial sector reforms
focused on inclusion, economic transformation, and a sustainable economy.
Directors observed that implementation of the 12th Malaysia Plan focused on boosting labor
productivity, enhancing the digital and green economies, and strengthening fiscal governance
would help minimize pandemic-related economic scarring while promoting inclusive growth
and job creation. They took note of the staff’s assessment that Malaysia’s external position is
moderately stronger than warranted by economic fundamentals and desirable policies.
Directors called for policies to strengthen social safety nets to support an inclusive recovery
and facilitate external rebalancing. They commended the authorities for the adoption of
climate policies that will increase Malaysia’s adaptive capacity and ambitiously bolster its role
in global mitigation efforts. Robust governance and anti-corruption reforms, enhanced
AML/CFT framework, and further trade liberalization are also important priorities
Table 1. Malaysia: Selected Economic and Financial Indicators, 2017-27
Nominal GDP (2021): US$372.8 billion Population (2020): 32.6 million
GDP per capita (2021, current prices): US$10,350 Poverty rate (2019, national poverty line): 0.2 percent
Unemployment rate (2021, end-of-period): 4.2 percent Adult literacy rate (2019): 95.0 percent
Main domestic goods exports (share of total domestic exports, 2021): Machinery and Transport Equipment (39.2 percent), Miscellaneous Manufactured Articles (16.6 percent),
and Manufactured Goods (10.8 percent).
Est. Proj.
2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027
Real GDP (percent change) 5.8 4.8 4.4 -5.6 3.1 5.7 5.7 5.0 4.5 4.5 4.0
Total domestic demand 6.6 4.7 4.0 -5.1 3.8 8.1 5.6 5.6 5.0 4.8 4.2
Consumption 6.7 7.1 6.6 -2.9 2.7 10.3 4.1 5.2 4.8 4.6 3.7
Private consumption 6.9 8.0 7.7 -4.3 1.9 13.9 5.7 5.3 5.4 5.3 4.2
Public consumption 5.7 3.4 1.8 3.9 6.6 -5.3 -4.5 4.7 1.0 0.7 0.6
Private investment 9.0 4.3 1.6 -11.9 2.6 10.0 8.2 7.5 6.5 6.0 5.8
Public gross fixed capital formation 0.3 -5.0 -10.7 -21.3 -11.4 6.1 6.1 5.0 4.8 4.2 4.2
Net exports (contribution to growth, percentage points) -0.3 0.4 0.7 -0.9 -0.4 -1.9 0.3 -0.4 -0.3 -0.2 0.0
Saving and investment (in percent of GDP)
Gross domestic investment 25.5 23.9 21.0 19.7 22.3 16.9 19.3 20.1 21.0 21.8 22.7
Gross national saving 28.3 26.1 24.5 24.0 25.7 20.3 22.6 23.3 24.1 24.8 25.7
Fiscal sector (in percent of GDP) 1/
Federal government overall balance -2.9 -3.7 -3.4 -6.2 -6.4 -6.1 -4.6 -4.4 -4.3 -4.2 -4.2
Revenue 16.1 16.1 17.5 15.9 14.3 14.1 13.6 13.6 13.5 13.5 13.5
Expenditure and net lending 19.0 19.8 18.4 22.1 20.7 20.2 18.3 18.0 17.8 17.7 17.7
Tax refunds (Arrears) 2/ 2.4
Federal government non-oil primary balance -3.4 -5.3 -6.7 -7.6 -6.6 -5.9 -4.0 -3.6 -3.3 -3.0 -2.9
Consolidated public sector overall balance 3/ -3.6 -2.9 -3.4 -7.0 -8.2 -8.6 -7.1 -6.8 -6.4 -6.2 -6.2
General government debt 3/ 54.4 55.6 57.1 67.8 69.0 70.6 69.9 69.9 69.8 69.6 69.5
Of which: federal government debt 50.0 51.2 52.4 62.1 63.4 65.0 64.3 64.3 64.2 63.9 63.8
Inflation and unemployment (annual average, in percent)
CPI inflation 3.7 1.0 0.7 -1.1 2.5 2.5 2.0 2.0 2.0 2.0 2.0
CPI inflation (excluding food and energy) 1.6 0.4 1.1 1.0 0.7 0.8 1.0 1.1 1.1 1.1 1.1
Unemployment rate 3.4 3.3 3.3 4.5 4.7 4.5 4.3 4.2 4.2 4.2 4.2
Macrofinancial variables (end of period)
Broad money (percentage change) 4/ 4.8 7.7 2.7 4.9 5.6 7.5 8.9 7.4 7.3 7.4 7.1
Credit to private sector (percentage change) 4/ 5.4 8.3 4.9 4.0 3.8 6.9 8.9 7.4 7.3 7.4 7.1
Credit-to-GDP ratio (in percent) 5/ 6/ 126.6 130.0 130.4 144.9 138.0 137.2 137.2 137.2 137.2 137.2 137.2
Overnight policy rate (in percent) 3.00 3.25 3.00 1.75 1.75 … … … … … …
Three-month interbank rate (in percent) 3.5 3.6 3.3 1.9 2.0 … … … … … …
Nonfinancial corporate sector debt (in percent of GDP) 7/ 101.3 102.6 99.1 109.8 108.0 … … … … … …
Nonfinancial corporate sector debt issuance (in percent of
GDP) 3.3 2.0 1.8 2.3 2.6 … … … … … …
Household debt (in percent of GDP) 7/ 82.6 82.0 82.7 93.2 … … … … … … …
Household financial assets (in percent of GDP) 7/ 176.4 175.7 179.0 205.0 … … … … … … …
House prices (percentage change) 6.1 2.5 1.8 1.2 … … … … … … …
Exchange rates (period average)
Malaysian ringgit/U.S. dollar 4.30 4.03 4.14 4.19 4.14 … … … … … …
Real effective exchange rate (percentage change) -1.6 4.1 -1.3 -3.6 -0.3 … … … … … …
Balance of payments (in billions of U.S. dollars) 5/
Current account balance 8.9 8.0 12.8 14.3 12.9 13.8 14.9 15.4 16.3 16.9 18.4
(In percent of GDP) 2.8 2.2 3.5 4.2 3.5 3.4 3.3 3.2 3.1 3.0 3.0
Goods balance 27.2 28.4 30.1 33.0 41.1 49.4 52.0 53.3 55.1 59.0 69.1
Services balance -5.3 -4.3 -2.6 -11.3 -14.7 -16.7 -18.4 -20.3 -22.8 -26.1 -33.8
Income balance -13.0 -16.1 -14.7 -7.4 -13.4 -18.9 -18.7 -17.5 -16.0 -16.0 -16.8
Capital and financial account balance -1.1 2.8 -9.1 -18.2 7.0 -4.1 -11.2 -13.9 -15.8 -15.6 -17.0
Of which: Direct investment 3.8 2.5 1.6 0.7 7.9 6.9 7.2 7.3 7.4 7.6 8.0
Errors and omissions -4.0 -8.9 -1.7 -0.6 -8.9 0.0 0.0 0.0 0.0 0.0 0.0
Overall balance 3.8 1.9 2.0 -4.6 11.0 9.7 3.6 1.5 0.5 1.3 1.5
Gross official reserves (US$ billions) 5/ 8/ 102.4 101.4 103.6 107.6 116.9 126.6 130.2 131.7 132.2 133.5 135.0
(In months of following year's imports of goods and nonfactor
5.5 5.8 6.7 5.6 5.4 5.7 5.7 5.6 6.2 6.7 7.3
services)
(In percent of short-term debt by original maturity) 117.8 103.4 108.8 117.7 123.8 117.6 120.9 112.4 107.0 101.9 94.4
(In percent of short-term debt by remaining maturity) 93.7 84.6 87.2 92.0 95.4 92.4 94.0 86.8 83.6 79.7 94.4
Total external debt (in billions of U.S. dollars) 5/ 8/ 218.8 223.5 231.5 238.5 256.4 276.6 285.0 306.0 322.5 341.5 363.5
(In percent of GDP) 68.5 62.3 63.4 70.7 68.9 68.1 63.4 63.1 61.5 60.4 59.8
Of which: short-term (in percent of total, original 39.7 43.9 38.4 36.8 38.9 37.8 38.3 38.3 38.4 39.4
maturity) 41.1
short-term (in percent of total, remaining
50.0 53.6 49.1 47.8 49.5 48.6 49.6 49.0 49.1 39.4
maturity) 51.3
Debt service ratio 5/
(In percent of exports of goods and services) 9/ 14.0 10.6 10.9 13.6 10.8 10.3 10.5 11.3 12.0 12.4 12.6
(In percent of exports of goods and nonfactor services) 14.8 11.2 11.6 14.5 11.7 11.1 11.3 12.2 13.1 13.5 13.7
Memorandum items:
Nominal GDP (in billions of ringgit) 1,372 1,448 1,513 1,417 1,544 1,660 1,807 1,941 2,083 2,238 2,398
Sources: Data provided by the authorities; CEIC Data; World Bank; UNESCO; and IMF, Integrated Monetary Database, and staff estimates.
1/ Cash basis. The authorities are planning to adopt accrual basis. For 2019, overall and primary balance includes the payment of outstanding tax refund (arrears) amounting to
RM37 billion.
2/ Tax refunds in 2019 are allocated for payment of outstanding tax refunds.
3/ Consolidated public sector includes general government and nonfinancial public enterprises (NFPEs). General government includes federal government, state and local
governments, and statutory bodies.
4/ Based on data provided by the authorities, but follows compilation methodology used in IMF's Integrated Monetary Database. Credit to private sector in 2018 onwards
includes data for a newly licensed commercial bank from April 2018. The impact of this bank is excluded in the calculation of credit gap.
5/ IMF staff estimates. U.S. dollar values are estimated using official data published in national currency.
6/ Based on a broader measure of liquidity. Credit gap is estimated on quarterly data from 2000, using one-sided Hodrick-Prescott filter with a large parameter.
7/ Revisions in historical data reflect the change in base year for nominal GDP (from 2010=100 to 2015=100).
8/ The decrease in short-term debt by remaining maturity in 2017 was partly due to the implementation of an improved data compilation system that corrected previous
overestimation.
9/ Includes receipts under the primary income account.
MALAYSIA
STAFF REPORT FOR THE 2022 ARTICLE IV CONSULTATION
March 7, 2022
KEY ISSUES
Context. Malaysia’s economy is showing signs of a gradual yet steady recovery thanks
to the authorities’ impressive vaccine rollout, swift and coordinated implementation of
multi-pronged support measures. The recovery nevertheless remains uneven and the
output gap sizeable, with significant downside risks. Going forward, the authorities
should calibrate macroeconomic policies to the pace of the recovery, while preserving
policy space given pandemic-related uncertainties, and simultaneously accelerate
structural reforms.
Main Economic Policy Recommendations:
• Additional targeted fiscal support is warranted in the near term, given the
remaining output gap. Fiscal policy support should continue to be nimble, with
focus on buttressing the recovery, preventing further scarring, and protecting the
most vulnerable.
• To rebuild buffers, fiscal consolidation should resume once the recovery is
entrenched, and be primarily revenue-based. The authorities’ commitment to
medium-term consolidation backed by a medium-term revenue strategy and a
fiscal responsibility act is welcome.
• The accommodative monetary policy stance is appropriate. Monetary policy
should remain data dependent. In case of adverse shocks, the exchange rate
should remain the main shock absorber; and there is space to ease monetary
policy if needed.
• The financial sector is sound, although the household debt overhang should be
addressed. The financial sector support measures have appropriately become
more targeted and are progressively being unwound alongside the recovery.
Continued strengthening of personal bankruptcy liquidation and bankruptcy
repayment plans would support orderly deleveraging.
• Structural reform policies are needed to foster inclusive growth, address climate
risks, and facilitate external rebalancing. Robust governance and anti-corruption
reforms would strengthen the management of public finances and the delivery of
public services.
MALAYSIA
Approved By Mission dates: January 24–February 9, 2022. The mission met with the
Odd Per Brekk and Governor and Deputy Governors of the Bank Negara Malaysia, the
Maria Gonzalez Under Secretary and Chief Economist of the Ministry of Finance, senior
staff from various line ministries/public sector entities, and
representatives from the private sector and civil society. Mission Team:
Lamin Leigh (Head), Alexander Copestake, Kodjovi Mawulikplimi
Eklou, Ghada Fayad, Nour Tawk (all APD), Natalia Novikova (Resident
Representative) and Tian Yong Woon (Economist in Singapore Office);
Rosemary Lim and Tengku Muhammad Azlan Ariff (Executive Directors
Office) joined the meetings. Odd Per Brekk (APD) joined the
concluding meetings. Kaustubh Chahande and Justin Flinner (both
APD) assisted in the preparation of this report. Data used in this report
for staff analyses are as of January 24, 2022, unless otherwise noted.
CONTENTS
CONTEXT: MALAYSIA NAVIGATING A MULTI-SPEED GLOBAL RECOVERY ___________________ 4
RECENT DEVELOPMENTS: A STEADY BUT UNBALANCED RECOVERY_________________________ 5
OUTLOOK: SOLID GROWTH WITH LINGERING PANDEMIC SCARS AND DOWNSIDE RISKS _ 7
POLICY DISCUSSIONS: CALIBRATING MACRO POLICIES TO THE PACE OF THE RECOVERY

WHILE ACCELERATING REFORMS ______________________________________________________________ 9
A. Fiscal Policy: Sustaining Recovery, Minimizing Scarring, Rebuilding Buffers, and Enhancing
External Rebalancing_________________________________________________________________________ 9
B. Monetary and Exchange Rates Policies: Transitioning to Policy Normalization ______________ 12
C. Financial Sector Policies: Safeguarding Stability _____________________________________________ 14
D. Structural Policies: The Post-Pandemic Transition—Promoting Inclusive Growth and Job
Creation ____________________________________________________________________________________ 15
E. Integrating Surveillance Advice and Capacity Development Support________________________ 17
STAFF APPRAISAL ______________________________________________________________________________ 17
FIGURES
1. Growth and Exports _________________________________________________________________________ 19
2. Inflation and Domestic Resource Constraints _______________________________________________ 20
3. Monetary Developments ____________________________________________________________________ 21
4. Capital Flows ________________________________________________________________________________ 22
5. Fiscal Policy Developments _________________________________________________________________ 23
6. Public Sector Fiscal Stance and Prospects ___________________________________________________ 24
7. Banking Sector Developments ______________________________________________________________ 25
2 INTERNATIONAL MONETARY FUND

MALAYSIA
8. Financial Soundness Indicators______________________________________________________________ 26

9. Household Debt ____________________________________________________________________________ 27
10. Residential Property Market_________________________________________________________________ 28
TABLES
1. Selected Economic and Financial Indicators, 2017-27 _______________________________________ 29
2. Indicators of External Vulnerability, 2017–21 ________________________________________________ 30
3. Balance of Payments, 2017–27 ______________________________________________________________ 31
4. Medium-Term Macroeconomic Framework, 2017–27 _______________________________________ 32
5. Summary of Federal Government Operations and Stock Positions, 2017–27 ________________ 33
6. Depository Corporations, 2017–21 __________________________________________________________ 34
7. Banks’ Financial Soundness Indicators, 2017–2021Q3 _______________________________________ 35
APPENDICES
I. The Financial Sector Blueprint: 2022-2026 __________________________________________________ 36
II. Public Debt Sustainability Analysis __________________________________________________________ 37
III. External Sector Assessment _________________________________________________________________ 45
IV. Trade Liberalization and GVCs as Engines of Growth in Malaysia ___________________________ 47
V. Economic Scarring and Distributional Consequences of the Covid-19 Pandemic in
Malaysia ____________________________________________________________________________________ 55
VI. Risk Assessment Matrix _____________________________________________________________________ 76
VII. Optimal Fiscal Policy in Malaysia ____________________________________________________________ 78
VIII. Fighting Climate Change in Malaysia _______________________________________________________ 87
IX. Capital Flows Volatility and Spillovers in Malaysia _________________________________________ 103
X. External Debt Sustainability Analysis ______________________________________________________ 113
INTERNATIONAL MONETARY FUND 3

MALAYSIA
CONTEXT: MALAYSIA NAVIGATING A MULTI-SPEED

GLOBAL RECOVERY
1. Pre-pandemic, Malaysia’s highly open and diversified economy delivered sustained
growth, on the back of strong policy frameworks. GDP growth averaged around 5 percent
in 2015-2019, boosting per capita income, while inflation was kept low. Despite significantly
narrowing in the wake of the Global Financial Crisis (GFC), persistent current account surpluses
prevailed reflecting a surplus of private saving over investments. The long-standing tradition of fiscal
prudence kept debt levels fairly contained. Malaysia is not an inflation targeter, as Bank Negara
Malaysia (BNM) has a broad mandate with multiple objectives and an equally broad policy toolkit.1
Continued development of domestic financial and foreign exchange markets and favorable debt
profiles have helped to mitigate the impact of external shocks on the economy.
2. With the population now largely vaccinated, the authorities have progressed in their
judicious reopening of the economy and strive to avoid a repeat of the strict lockdown policies
that halted the recovery in 2021. Caseloads in 2021 reached levels unseen in 2020. The
reimposition of nationwide containment measures that accompanied the worsening pandemic
stalled the nascent recovery in 2021, notwithstanding several additional fiscal stimulus packages.
Now in the face of the Omicron variant, no further nationwide lockdowns are envisaged, supported
by large vaccination rates and the ongoing vaccine booster program.2
Text Figure: Malaysia & Other ASEAN-5: COVID-19 Cases & Vaccinations
3. The 12th Malaysia Plan (12MP) for 2021-25 aims for high-income status and a carbon-
neutral economy. The plan provides a five-year road map, aiming to boost labor productivity and
transport infrastructure, accelerate innovation and enhance the digital and green economies, while
narrowing development disparities across regions and strengthening fiscal governance. The 12MP
strategy aims to increase investment in human capital and the contribution of MSMEs to the
1
See Appendix VI of IMF Country Report 20/57 for a description of the BNM’s monetary policy framework.
2
About 44¾ percent of the population have received a booster shot by February 28, 2022.

MALAYSIA
economy.3 It comes at an opportune time when Malaysia is yet to secure a solid and broad-based
recovery; and at-risk fiscal space argues for nimble implementation to preserve policy space.
RECENT DEVELOPMENTS: A STEADY BUT

UNBALANCED RECOVERY
4. The recovery has been strengthening but
has remained uneven. The severe Delta outbreak
in the middle of 2021 prompted strict nationwide
containment measures, which limited real GDP
growth to about 3 percent, while inflation was
contained at 2½ percent (Table 1). The export-
oriented manufacturing sector, which remained
operative during shutdowns, underpinned this
growth, while weaknesses in the agricultural sector
reflected prolonged labor shortages due to lower
flows of migrant workers. Contact-intensive sectors,
including tourism, have been hard-hit.
5. The economy was helped by the swift, significant, and multi-pronged pandemic policy
response in 2021. Total COVID-related fiscal spending amounted to RM39 billion (2½ percent of
GDP) in 2021, more than double the initially budgeted RM17 billion, and above the RM38 billion
spent in 2020. As a result, the federal government deficit is estimated at about 6½ percent of GDP
in 2021, higher than the 5½ percent deficit foreseen in the 2021 Budget. Federal government debt is
estimated at 63 percent of GDP, remaining below the effective debt ceiling implied by the twice-
3
See Appendix I.

MALAYSIA
raised domestic debt ceiling from 55 to 65 percent of GDP.4 Staff’s baseline projections reflect a
gradual decline in the fiscal deficit over the medium term, broadly in line with the authorities’ targets
up until 2024, but deviates from authorities’ path from 2025 as the 3.5 percent deficit target is not
yet underpinned by identified measures. BNM maintained an accommodative monetary policy
stance, with its overnight policy rate unchanged at a record low of 1¾ percent through early 2022.
Additional lending facilities, including for SMEs, were established and a six-month loan moratorium
was extended to individuals, micro enterprises and SMEs that were adversely affected by the
pandemic in July 2021.
6. Reflecting the uneven recovery, labor market outcomes showed significant variation
across sectors and skill levels. The unemployment
rate declined to about 4¼ percent in 2021Q4 (2021:
4½ percent) but is still high for women ( 4
½ percent) and youth (about 11¾ percent). Under-
employment (skill-based and time-based) remains
elevated while unemployment has
disproportionately increased for those with less
education. The pandemic has also displaced higher-
skilled workers, as only 40 percent of them are re-
employed and often in placements below their skill
levels. Meanwhile, over 57 percent of new
placements were in jobs earning lower wages.5
7. The banking system remained sound amidst uncertainty around asset quality and
profitability (Table 7). At end-November 2021, the banking sector total capital ratio stood at
18 percent and the Liquidity Coverage Ratio at 145 percent (above the 100 percent minimum
requirement). Non-performing loans (NPLs) remained low at 1½ percent of total loans, but the share
of SME loans under repayment assistance reached about 36¾ percent, warranting close monitoring.
Both BNM’s top-down and individual bank stress tests as of 2021 affirmed the resilience of the
4
Appendix II provides detailed information on the debt ceiling.
5
Source: Malaysia’s Employment Insurance System (November 2021).

MALAYSIA
banking system to withstand adverse economic and financial shocks, while highlighting that credit
risk remains high especially in the business sector.6
8. The capital account was broadly stable in 2021 and foreign exchange interventions
(FXI) two-sided in line with swings in capital flows.7 Net portfolio flows reached around
$7½ billion by December 2021, primarily driven by sustained net debt inflows ($8¼ billion). Non-
resident holdings of government securities increased by 15¾ percent compared to end-2020 as FTSE
Russell kept Malaysia in its World Government Bond Index and removed the country from its fixed-
income watch list. Gross FX reserves increased by US$9¼ billion in 2021, helped by the US$5 billion
SDR allocation (about 1¼ percent of GDP). Reserves remain adequate at 126 percent of the ARA
metric.
9. Malaysia’s external position in 2021 is preliminarily assessed to have been moderately

stronger than warranted by medium-term fundamentals and desirable policies (Appendix III).
While the current account surplus is viewed as a sign of strength by investors, it represents a gap of
1.1 percent that reflects deviations from fundamentals and desirable policy levels, in part driven by
relatively lower spending on social safety nets in Malaysia. Policies that aimed to strengthen social
safety nets, encourage investment, and boost productivity, would help facilitate external rebalancing.
External debt declined in 2021 compared to 2020 but remains above pre-pandemic levels with one-
third of debt denominated in local currency, and about half of short-term external debt in the form
of intragroup borrowings among banks and corporations, which have been generally stable during
the pandemic (Appendix X).
10. Economic policies have been broadly in line with past Fund advice. Consistent with IMF
recommendations, the authorities are anchoring fiscal policy on their medium-term consolidation
objective. The current monetary policy stance is in accordance with staff advice to carefully calibrate
monetary policy in response to economic conditions, and the authorities continue to indicate their
commitment to exchange rate flexibility as the first line of defense against external shocks. Steady
progress is being made on structural reforms although the pandemic has laid bare pre-existing
vulnerabilities, most notably as regards social safety nets, which call for capacity development (CD)
support.
OUTLOOK: SOLID GROWTH WITH LINGERING

PANDEMIC SCARS AND DOWNSIDE RISKS
11. Economic growth is projected to be solid in the medium term, although risks of long-
term economic scarring are real. Growth in 2022 is projected at 5¾ percent driven by pent-up
domestic demand, given the high vaccination rate and expected low movement restrictions, and
6Banks have notably increased provisions by about 60 percent compared to pre-pandemic levels. Total provisions for
potential credit losses stood at around 2 percent of total banking system loans in November 2021.
7
Staff relies on FXI proxy data from the database of Adler et al. (2021) and changes in reserves, which are imperfect
proxies for the direction of FXI, in making this assessment.

MALAYSIA
continued strong external demand. However, the pandemic could lead to permanent GDP losses
(Appendix V) with a persistent negative impact on trade and Global Value Chain (GVC) patterns
(Appendix IV). Given scarring effects, the output gap is expected to narrow to -3½ percent and
-2¼ percent in 2022 and 2023 respectively. Inflation is projected to stabilize at 2½ percent despite
transitory supply-chain challenges. The current account (CA) surplus is expected to decline gradually
over the medium term, as consumption and capital-related imports recover, despite a gradual pick
up in foreign tourism flows as the economy reopens (Table 3).
12. Downside risks dominate the outlook (GRAM—Appendix VI).
• Downside: The main near-term downside risk threatening the recovery is a re-intensification of
the pandemic with mutated vaccine-resistant variants, leading to a more protracted pandemic,
reducing mobility as economic agents voluntarily socially distance, and potentially leading to
renewed global travel restrictions. Fiscal risks from contingent liabilities could materialize and
could necessitate additional measures to ensure medium-term fiscal sustainability. Long-
standing political and related policy uncertainty could have implications for reform momentum,
with potential implications for public investment as well as fiscal and debt vulnerabilities. Other
risks include a sharper slowdown in China, Malaysia’s largest trading partner, and a disorderly
monetary policy normalization in AEs. The ongoing conflict in Ukraine poses additional risks
through volatile and higher food and fuel prices and the attendant impact on growth of
Malaysia’s major trading partners most notably Europe.
• Upside: Higher-than-expected pent-up demand domestically is the main upside risk to the
outlook.
13. Distributional risks of the pandemic loom large. ASEAN-5: Gini Coefficient
(Index)
The pandemic may exacerbate income inequality and 0.50
Indonesia Philippines Singapore Thailand Malaysia
0.50
represents considerable risks to SMEs, workers in contact- 0.48 0.48
0.46 0.46
intensive sectors, low-skilled workers, and those in the 0.44 0.44
informal sector. Pandemic-related loss of schooling in low- 0.42 0.42
0.40 0.40
income and vulnerable households, estimated by the 0.38 0.38
World Bank at 1.3 years, could also lead to a permanent 0.36
0.34
0.36
0.34
loss in human capital. These impacts have the potential to 0.32 0.32
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
linger over the medium to long term (Appendix V). Sources: Respective National Statistical Agencies; World Bank (for Thailand); and CEIC Data.
Authorities’ Views
14. The authorities broadly agreed with staff’s assessment of the outlook and risks. They
view growth at 5½–6½ percent in 2022, with inflation normalizing towards its long-term average.
Under the expectation of no further lockdowns, growth would be driven by improvement in overall
income and employment conditions, some pent-up private consumption, continued strong external
demand, as well as continuous progress in infrastructure spending. They expect a significant
narrowing of the output gap in 2022 driven by an expected strong recovery in output as the
economy fully reopens and activity normalizes.

MALAYSIA
15. The authorities expressed reservations regarding the external balance assessment. The
authorities questioned the ability of the EBA’s adjustors to fully capture Malaysia specific factors,
including transitory effects of the COVID-19 pandemic. They are pursuing reforms to strengthen
social safety nets and to encourage private investment and productivity growth, which should help
external rebalancing. With regard to external debt sustainability, they noted that, while external debt
is high, it remains manageable given mitigating factors: (i) the sustained current account surplus
signals strength in Malaysia’s repayment capacity and reduces external financing needs, (ii) banks
and corporations’ intragroup borrowings (around half of short-term debt) are generally stable and
on concessional terms, and (iii) sizable net foreign currency-denominated external asset position
held by domestic entities.
POLICY DISCUSSIONS: CALIBRATING MACRO POLICIES

TO THE PACE OF THE RECOVERY WHILE ACCELERATING
REFORMS
Macroeconomic policies should be calibrated to address the sizeable economic slack, high uncertainty,
and medium-term scarring, while preserving policy space given pandemic-related risks and
development spending needs. Structural reforms, including governance and anti-corruption reforms,
should aim at boosting medium-term growth, reducing inequality and enhancing external rebalancing.
Temporary additional fiscal support, combined with a further easing of the monetary policy stance,
could be considered if downside risks materialize.
A. Fiscal Policy: Sustaining Recovery, Minimizing Scarring, Rebuilding

Buffers, and Enhancing External Rebalancing
16. Additional, targeted fiscal support is warranted in 2022-2023. The 2022 Budget allocated
RM23 billion (1.4 percent of GDP) out of the COVID Fund for COVID-related spending, with an
increasing share spent on upskilling programs, social assistance support to vulnerable groups, and
SME financing. Considering the still-sizable projected economic slack, medium-term pandemic
scarring effects, generally favorable debt dynamics, and staff’s assessment that debt is sustainable
(Appendix II), staff advice is to provide modest additional fiscal support by about 2 percentage
points cumulatively in 2022 and 2023 above the 2022 budget plans, moving the fiscal impulse
in 2022 from negative to moderately positive territory, and delaying the start of consolidation by one
year to 2023.8 The additional stimulus would close the output gap faster than in the baseline, thus
helping limit the pandemic’s scarring effects. Targeted additional spending should center on
protecting the vulnerable (notably low-income highly-indebted households), supporting viable SMEs
in hard-hit sectors, and minimizing the impact of scarring on inequality, and increasing productive
capacity—through public investments in green and climate-resilient projects, improved training and
8
Staff analysis is based on a stochastic model calibrated for Malaysia, which explores tradeoffs between
macroeconomic stabilization and debt sustainability (Appendix VII).

MALAYSIA
education, strengthened health policies, and digital transformation. However, the higher public debt
with pre-COVID-19 fiscal vulnerabilities, warrants a cautious approach towards continued fiscal
support, as a protracted pandemic could entail future spending pressures. In that respect, federal
government debt remains below the effective debt limit (of 67 percent of GDP) implied by the twice-
raised 65 percent of GDP limit on domestic debt under both baseline and staff recommended fiscal
paths. Furthermore, staff recommendation involves a larger consolidation (by about 3 percentage
points) in the medium term compared to the passive baseline, that would put debt on a firm
downward trend and help rebuild fiscal buffers necessary to respond to future shocks.
17. Over the medium term, fiscal consolidation should be growth-friendly and backed by
robust governance and anti-corruption measures to support sound public financial
management. Fiscal adjustment should start once the output gap is sufficiently closed and be
primarily revenue-based to help rebuild the buffers and enable the adoption of measures that are
important for external rebalancing. To maximize the return to public investment, the authorities
should continue to implement past Fund advice on fiscal governance reforms contained in the 2018-
2019 Article IV consultations reports, with a focus on reducing vulnerabilities to corruption. While the
increases in the debt ceiling were appropriate in view of COVID-related as well as broader
development spending needs under the 12MP, staff recommend embedding changes to the debt
ceiling and clearly defined ex ante escape clauses within the Fiscal Responsibility Act (FRA). The
escape clauses would specify what constitutes large shocks, allow temporary breaches of the debt
ceiling if those materialize, while at the same time setting a clear framework to bring debt back
under the limit and help preserve Malaysia’s fiscal credibility. In that respect, the authorities’ aim to
bring debt below 60 percent of GDP in the medium to long term is appropriate. Staff welcome the
planned reforms to the approach of government guarantees, a long-standing fiscal risk in Malaysia,
under its medium-term debt management strategy.
18. Embarking on the medium-term revenue strategy (MTRS) is an urgent priority.

Malaysia’s tax revenues have been on a declining trend and are low compared to peers, and the
pandemic highlighted the need for revenue mobilization. The 2022 Budget appropriately called for
bold and effective reforms to the tax system through the adoption of a MTRS, to ensure sufficient
funding for expenditure needs under the 12MP. A welcome and long-awaited review of the tax
incentive system is underway under the MTRS umbrella. However, meeting the 3½ percent of GDP
targeted deficit will require measures beyond improving tax compliance. First, policy reforms that
increase the efficiency and equity of the tax system without imposing a higher average tax burden
should be front-loaded to support the recommended expansionary fiscal stance. Second, once the
recovery is entrenched, tax policy options include reinstatement of the goods and services tax (GST).9
Also, carbon taxation should be considered in the context of a comprehensive climate mitigation
strategy that could generate 1 to 3 percent of GDP in fiscal revenues by 2030 (Appendix VIII); staff
welcome the authorities’ ongoing studies on the feasibility of implementing a carbon tax. Low-
income households, workers, and firms more vulnerable to higher energy prices implied by a carbon
tax could be identified and compensated adequately, including through higher social transfers.
9
Staff estimates suggest that the 2018 GST removal created a revenue loss of 1¼ percent of GDP.

MALAYSIA
Text Figure. Baseline-, Model-, and Staff Recommended- Fiscal Paths and Key Indicators of
Fiscal Space
Structural Primary Balance Federal Government Debt

(in Percent of GDP) (in Percent of GDP)
2 70
Model Advice Baseline Staff Advice
1
65
0
-1 60
-2
55
-3
50 Model Advice Baseline Staff Advice

-4
-5
2019 2020 2021 2022 2023 2024 2025 2026 2027 45
2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031
Output Gap
(in percent of potential GDP)
Fiscal Space Assessment: RelevantRelevant
Fiscal Space Assessment: Indicators for Malaysia
Indicators for Malaysia
1
Model Advice Baseline Staff Advice
0
-1 Favorable debt dynamics: high share of debt: High contingent liabilities

Held domestically
-2 Issued in local currency
At longer maturites
-3 Negative interest rate growth differentials Large external financing requirements
Low public gross financing needs Increase in debt post-pandemic
-4 Reasonable market access costs
Lack of demographic pressures
-5 Track record of fiscal prudence
2019 2020 2021 2022 2023 2024 2025 2026 2027
Text Table. Malaysia: Fiscal Path: Baseline vs. Staff Recommendation

2021 2022 2023 2024 2025 2026 2027
Structural Primary Deficit to Potential GDP
Baseline -3.3 -2.9 -1.4 -1.1 -0.9 -0.7 -0.7
Staff recommended -3.3 -3.6 -2.8 -1.3 -0.2 0.4 0.6
Fiscal Impulse
Baseline 1.0 -0.4 -1.5 -0.3 -0.3 -0.2 0.0
Staff recommended 1.0 0.3 -0.8 -1.5 -1.1 -0.6 -0.2
Overall Deficit to GDP

Baseline -6.4 -6.1 -4.6 -4.4 -4.3 -4.2 -4.2
Staff recommended -6.4 -7.0 -5.9 -4.4 -3.4 -3.0 -2.9
Federal Government Debt to GDP
Baseline 63.4 65.0 64.3 64.3 64.2 63.9 63.8
Staff recommended 63.4 65.7 66.1 66.1 65.9 64.9 63.8
Output Gap
Baseline -3.8 -3.6 -2.2 -1.5 -1.1 -0.7 0.0
Staff recommended -3.5 -2.8 -1.0 -0.1 -0.2 -0.3 -0.3

MALAYSIA
19. The authorities noted that their policy response thus far has averted a deeper
downturn and that the time is right to resume fiscal consolidation which was interrupted by
the pandemic. While they highlighted that the new debt ceiling provides the space for larger fiscal
support to speed up the economic recovery, the improvement in the economy’s cyclical position
in 2022 in their view suggests the need to start a cautious fiscal adjustment path to ensure
sustainability. Given the effect of the pandemic and the country’s large development needs, the debt
ceiling of 65 percent of GDP on domestic debt is envisaged to remain until 2025, with a goal of
reducing debt below 60 percent by then.
20. The authorities highlighted the significant progress towards finalizing pending fiscal
reforms. They will advance on the MTRS where they will consider new sources of revenues such as
reintroduction of the GST, carbon tax, and capital gains tax once the recovery is entrenched. They are
optimizing expenditures to enhance spending efficiency through public expenditure review,
targeting subsidies, and through pension and civil service reforms. They reiterated their commitment
to finalizing and introducing the FRA this year, which aims at further enhancing governance,
accountability, and transparency in fiscal management.
B. Monetary and Exchange Rates Policies: Transitioning to Policy

Normalization
21. The current accommodative monetary policy stance is appropriate. The real over-night
policy rate (OPR) adjusted for one-year ahead inflation expectations implies that short term real
interest rates remain close to zero. At the aggregate level, there are no signs of liquidity strains, and
domestic financial conditions remain accommodative consistent with the financial condition index
(Figure 3). The outlook for core inflation remains benign, and headline inflation is projected to
remain broadly unchanged in 2022. The significant output gap and the slack in the labor market limit
the risk of second round effects, and inflation expectations are well anchored. Monetary policy
should remain data dependent–a tightening would be appropriate if there is strong evidence of de-
anchoring of inflation expectations and, conversely, the BNM has room to further ease monetary
policy, in combination with the supportive fiscal policy, if downside risks materialize.

MALAYSIA
22. Against the backdrop of monetary policy normalization in AEs, monetary policy should
remain agile. Malaysia is well prepared to face a gradual increase in global interest rates under the
baseline (Appendix IX ). However, a sharp tightening of global financial conditions and risk-off
investor behavior could lead to surges in capital outflows. Under disorderly market conditions (DMC),
exchange rate flexibility combined with liquidity support, including in foreign currency, and monetary
policy accommodation striking a balance between supporting growth and managing capital
outflows, should be the first line of defense. However, in imminent crisis circumstances, temporary
outflow capital flow management measures (CFMs) as part of a broader policy package could be
considered in line with the Fund’s institutional view (IV).
23. The exchange rate should continue to serve as a shock absorber, with foreign exchange
intervention (FXI) limited to DMC. Further reserve accumulation is not called for, given the
adequate reserve coverage and the undervaluation of the Ringgit. Malaysia’s relatively liquid FX
market, with no strong evidence of FX mismatches that pose systemic risk to the broader financial
system, and a mature and multi-pronged monetary policy framework, limit the argument for FXI
outside DMC. Accordingly, while employing FXI, the BNM should consider its interactions with other
policies, against the backdrop of the moderately stronger external position. The BNM’s steps to
liberalize foreign exchange policy and to deepen the FX market are welcome.10 These include the
implementation of electronic trading platforms for access and price discovery, the improvement of
market trade transparency via daily publication of interbank FX and money market data, and the
liberalization of CFMs.11 In this context, existing CFMs should be gradually phased out with due
regard to market conditions. Publication of FXI data (with an appropriate lag to guard against market
sensitivities) could enhance communication and strengthen the commitment to the monetary policy
framework. The progress made on the operationalization of the BNM’s multi-tool monetary policy
model, leveraging the joint work with the Fund on the integrated policy framework (IPF) modelling, is
welcome.
24. The authorities agreed with staff’s assessment, albeit with some reservations. They view
the monetary policy stance as accommodative with inflation expectations well-anchored and policy
settings well-calibrated to the phase of the recovery and price dynamics. Transition to policy
normalization would be guided by a sustained narrowing, but not necessarily closing, of the output
gap, sustained growth in private consumption, an improved labor market, and stronger investment
10
See IMF Country Report 20/57 for a discussion of the measures assessed as CFMs.
11
Under the Fund’s taxonomy, this would be considered as a CFM easing. As of April 15, 2021 the authorities have
removed the export conversion rule (i) allowing residents to now manage the conversion of export proceeds
according to their foreign currency cash flow needs while previously exports proceeds below RM200000 were
exempted, (ii) allowing now resident exporters to settle domestic trade in foreign currency with other resident entities
provided that they are in the global supply chain, (iii) providing resident exporters with the possibility for repatriation
of export proceeds up to 24 months (iv) the possibility for resident exporters to net off export proceeds against
permitted foreign currency obligations for some specific reasons. Since 2007, residents with domestic Ringgit
borrowing are allowed to invest up to RM1 million equivalent in aggregate per calendar year on individual basis or up
RM50 million equivalent per calendar year in aggregate on a corporate group basis.

MALAYSIA
without overreliance on policy support. Regarding monetary policy normalization in AEs, they view
the exchange rate as the first line of defense playing the role of a shock absorber, and reiterated
their commitment to exchange rate flexibility. However, they also highlighted mitigating factors
including the limited external exposure given low reliance on foreign funding, and the general
preparedness of the markets based on previous experiences. The authorities disagreed on the
recommendation to phase out the remaining FX market development measures that the Fund
classifies as CFMs. They view these measures as necessary for financial stability and as prudential in
nature, building the resilience of domestic markets consistent with the mandate of the BNM. The
BNM continues to have reservations about the benefits of regular publication of FXI data given the
trade-offs, including the likely impact on market speculation.
C. Financial Sector Policies: Safeguarding Stability
25. Addressing the household debt overhang is a priority. Total household debt fell below
90 percent of GDP in June 2021 as borrowers resumed payments after exiting from the loan
moratoria. High household financial assets at around 194½ percent of GDP help mitigate the
vulnerability from high household debt. Risks appear confined in a narrow segment of mostly low-
income borrowers with an exposure estimated to account for only about 1¼ percent of the banking
system loans.12 However, the pandemic has taken a toll on household incomes, with growth in
household financial assets moderating to around 5½ percent in June 2021 from about 7¼ percent in
December 2020 owing to withdrawal from retirement savings to smooth consumption. Staff welcome
the development of strong preventive strategies (e.g. advice to debtors on smart deleveraging
techniques and informal debt restructuring) and ex-post measures such as personal debt
enforcement tools and the work undertaken on their personal bankruptcy framework. To consolidate
on this progress, further improvements are needed in the areas of ex-post measures including,
personal bankruptcy liquidation and bankruptcy repayment plans to support orderly deleveraging
(Garrido et al, 2020).13
26. Continued targeted support to the corporate sector would help limit scarring and shore
up viable firms through the recovery. Non-financial corporates (NFCs) debt stood at 110 percent
of GDP at the end of 2020. The share of firms-at-risk—the proportion of NFCs with an interest
coverage ratio below 2—moderated to 26 percent in the middle of 2021 but remains above pre-
pandemic levels. Targeted policies should continue to support viable firms, with the main principles
being to limit moral hazard, articulate clear eligibility requirements and exit strategies, and facilitate
an efficient allocation of resources in the economy. Measures will need to be continuously geared
toward and account for the characteristics of SMEs, which make up the majority of Malaysian firms
and employment and have been disproportionality affected by the pandemic shock. Meanwhile, the
BNM should continue to enforce robust monitoring, including timely information gathering to assess
credit risk, particularly in SMEs, and full provisioning of expected losses.
12
BNM Financial Stability Review—First Half 2021.
13
https://www.elibrary.imf.org/view/journals/001/2020/172/001.2020.issue-172-en.xml.

MALAYSIA
27. The unwinding of the pandemic-related support should continue as the recovery
becomes entrenched. Regulatory and supervisory policies will play a critical role in preserving
financial stability and credit discipline and ensuring that the flow of credit to the real economy is
sustained during the unwinding period. Staff welcomed the authorities judicious unwinding of
forbearance measures and their targeted approach to financial support measures to vulnerable and
hard-hit sectors, which could include further refinement of the eligibility criteria, as needed.14 The
BNM should fully enforce prudential and regulatory frameworks as relief measures are gradually
lifted, allowing flexibility in timing by requiring banks to implement medium-term plans to restore
capital or liquidity shortfalls. The BNM’s Financial Sector Blueprint (2022-2026) strategy on fostering
financial inclusion, economic transformation, and a sustainable economy, is welcome (Appendix I).
28. The authorities should continue to enhance the effectiveness of the AML/CFT
framework. Staff welcome recent legislative initiatives and improvements made in compliance with
requirements related to politically-exposed-persons (PEPs) by banks and urge further action on the
full implementation of the beneficiary ownership (BO) guideline. The authorities should focus on high
risks areas identified in the National Risk Assessment including BO and domestic PEPs and continue
to monitor the implementation of requirements consistently with the Financial Action Task Force
(FATF) standards.
29. The authorities broadly agreed with staff’s assessment. They noted that while household
debt remains high, the net financial assets position of households remains comfortable. The
authorities noted that banks’ asset quality in the household segment is sound and provisions remain
adequate. They also affirmed that the financial sector has enough buffers to absorb sizable shocks
and remains resilient although credit risks remain high. They noted that as financial sector support
measures have become more targeted and are progressively unwound alongside the economic
recovery, close attention will be provided to financial stability risks. They also noted sustainable
finance as a key overarching theme of 12MP, the Financial Sector Blueprint and the Capital Market
Masterplan. The BNM has also published a series of guides for financial institutions which will
facilitate the planned mandatory disclosure of climate-related risks by financial institutions
from 2024, and the inclusion of such risks in financial sector stress tests.
D. Structural Policies: The Post-Pandemic Transition—Promoting Inclusive

Growth and Job Creation
30. Coordinated policies are needed to address structural challenges, limit economic
scarring from the pandemic, boost productivity, and address inequality. Malaysia’s 12MP
priorities are well targeted towards these challenges. These include boosting the digital economy,
reforming the labor markets, elevating the level of education, encouraging broad-based productivity
drivers, accelerating governance and anti-corruption reforms, and adopting climate policies that
14
In this regard, the authorities have introduced the URUS program to support vulnerable individual borrowers hard-
hit by the pandemic in the bottom 50 percent group.

MALAYSIA
increase Malaysia’s adaptive capacity and ambitiously bolster its role in global mitigation efforts
(Appendix VIII). Active labor market policies to upskill workers dislocated by the pandemic could
incentivize movement from informal to formal employment, thus facilitate reallocation of resources
and limit scarring. Staff recommend upgrading the social protection system to support external
rebalancing and an inclusive recovery, including temporarily expanding coverage of existing social
safety net programs to include more vulnerable households and expanding program coverage in
affected remote areas targeting children from low-income households who have experienced loss in
schooling during the pandemic. The authorities should accelerate the implementation of the
strategies outlined in the National Anti-Corruption Plan (NACP), including the legislative initiatives on
freedom of information, increased procurement transparency, and strengthening independence and
capacity of prosecution office and judiciary to handle corruption cases more effectively.
31. Reenergizing trade liberalization and reform would help boost growth and productivity
in Malaysia. Trade, especially GVC trade, stalled leading up to the pandemic, in part due to still-high
trade restrictions in the region, which have changed little since the 1990s. Trade liberalization
through regional initiatives such as the Regional Comprehensive Economic Partnership (RCEP)15 and
the ratification of the Comprehensive and Progressive Agreement for the Trans-pacific Partnership
(CPTPP) as well as loosening of non-tariff barriers, easing of trade & technology tensions and the
facilitation of digital trade, could support medium-term growth (Appendix IV ).
32. The tourism sector needs a holistic and multi-pronged strategy for adapting to the
post-pandemic period.16 The sector’s value added averaged a high of 15 percent of GDP pre-
pandemic and 14.1 percent in 2020. The pandemic is expected to leave scars in the tourism sector —
a strategic and high impact sector in the vision of 12MP—following two years of travel restrictions
and intermittent lockdowns. For the medium term, a shift towards a more sustainable and higher
value-added tourism model could be explored. A move to lower-density tourism services with higher
unit revenue might help reduce the potential health risks from mass travel and foster a greener
recovery.
33. The authorities noted progress on 12MP priorities, including on carbon-neutrality, and
governance reforms under the NACP. They have pledged to achieve net zero emissions by 2050
and are proceeding steadily with their ambitious mitigation and adaptation plans. There is strong
institutional coordination on climate change and plans to integrate climate risk within
macroeconomic and financial stability assessments. Studies are ongoing on carbon pricing including
how to address its implications for low-income households, workers, and firms. The draft bill for the
establishment of the Ombudsman office is expected to be tabled in Parliament this year. On
procurement, they are introducing integrity and governance elements to the current legislative
framework. Several Members of Administration and Parliament have already submitted asset
15
The RCEP was ratified in January 2022.
16
Staff analysis of the impacts from COVID-19 on tourism in the Asia-Pacific and Caribbean economies, with policies
and reforms to mitigate the impact on output and jobs, can be found here.

MALAYSIA
declarations, but the laws governing such declarations have not been finalized yet. They agreed that
reductions in non-tariff restrictions could be beneficial, namely for trade in services. They highlighted
that their National Tourism Policy for 2020-2030 aims to embrace smart tourism as part of the
tourism recovery plan which encourages digital promotion and seamless/touchless travel journeys.
They agreed on the need for reforms to expand the coverage of the social protection system,
address its fragmentation, and raise benefits to adequate levels.
E. Integrating Surveillance Advice and Capacity Development Support
34. Fund capacity development (CD) work aims to be supportive of surveillance advice and
the authorities’ policy agenda. Progress being made on finalizing the FRA and developing the
MTRS is welcome and the authorities could consider engaging the Fund for any remaining capacity
development needs on both fronts, as needed. The pandemic has highlighted the need to
strengthen the targeting of welfare programs, especially given its likely impact on inequality.
Ongoing joint technical work with the BNM on macro-modelling has gained traction with the BNM
and bodes well with the Fund’s workstream in the operationalization of the integrated policy
framework (IPF).
Text Table. The Nexus Between CD Priorities and Surveillance Advice
CD priorities Surveillance Advice
Fiscal Responsibility Act (FRA) FRA is key to putting debt on a firm downward trend, rebuild fiscal buffers
necessary to respond to future shocks and ensure robust fiscal governance
and transparency to enhance management of the public finances.
Medium-Term Revenue Strategy (MTRS) A MTRS is needed as a central pillar of medium-term fiscal consolidation as
Malaysia’s tax revenues have been on a declining trend and are low
compared to peers.
Social safety nets Social safety nets should be strengthened to expand the coverage of the
system, address its fragmentation, and raise benefits to adequate levels, a
high priority that has been laid bare by the pandemic.
Integrated Policy Framework (IPF) Strengthen macroeconomic modelling, operationalize IPF tools and explore
interactions between FXI and other IPF tools.
STAFF APPRAISAL
35. The recovery is steady but remains uneven. After being hard hit in 2020, the Malaysian
economy rebounded in 2021 with growth driven by the manufacturing sector on the back of strong
external demand. Contact-intensive and the agriculture sectors however remained weak.
Malaysia’s 2021 external position was moderately stronger than warranted relative to fundamentals
and desirable policies.
36. Downside risks cloud the near-term outlook. These include vaccine-resistant COVID-19
variants, amid the recent uptick in Omicron cases, monetary policy normalization in advanced

MALAYSIA
economies and spillovers from the ongoing conflict in Ukraine. Distributional risks of the pandemic
threaten progress toward reducing inequality over the last decades. Macro policies need to be more
accommodative if downside risks materialize.
37. Fiscal policy needs to be nimble and targeted to buttress the recovery in the near term,
followed by well-specified fiscal consolidation centered on revenue mobilization over the
medium term. Additional targeted support is warranted in 2022-23 with a focus on the vulnerable
and hard-hit sectors to minimize scarring. Policy space should be preserved for future shocks,
including a protracted pandemic. Fiscal consolidation should start once the recovery is entrenched,
be primarily revenue-based and support spending priorities to facilitate external rebalancing. Staff
welcome the authorities’ commitment to fiscal sustainability.
38. The current accommodative monetary policy stance is appropriate. There is ample
liquidity in the financial system, inflation expectations are well anchored, and there remains slack in
the economy. Monetary policy should remain data dependent, guided by close monitoring of
pandemic developments, inflation expectations and wage growth. Staff welcome the authorities’
ongoing joint work with the Fund towards operationalizing the IPF tools, an example of effective CD-
surveillance integration. The flexible ringgit exchange rate has served Malaysia well, and the
authorities’ continued commitment to exchange rate flexibility is welcome.
39. The authorities’ commitment to safeguarding the stability of the financial sector as
pandemic measures are being unwound is welcome. While aggregate household net financial
asset position remains comfortable, pockets of vulnerabilities remain in the low-income borrowers’
segment. Continued efforts to strengthen personal bankruptcy liquidation and bankruptcy
repayment plans could support orderly deleveraging. Staff welcomes the authorities’ continued
targeting of financial sector support measures and their progressive unwinding in line with the
recovery, while paying close attention to financial stability risks.
40. Determined implementation of 12MP will help minimize pandemic-related economic
scarring and enhance economic resilience while promoting inclusive growth and job creation.
The 12th Malaysia Plan focus on labor market reskilling and boosting productivity would help lift up
potential growth. Strengthening social safety nets would support inclusive recovery and staff sees
scope for additional CD support to improve the targeting of welfare programs especially given the
likely impact of the pandemic on inequality. Liberalizing non-tariff barriers could provide a welcome
fillip to growth, and a holistic and multi-pronged strategy is needed to adapt the national tourism
model to the post-pandemic new normal. Robust governance and anti-corruption reforms, including
the implementation of the strategies outlined in the National Anti-Corruption Plan, would strengthen
the management of the public finances.
41. It is recommended that the next Article IV consultation with Malaysia be held on the
standard 12-month cycle.

MALAYSIA
Figure 1. Malaysia: Growth and Exports

Growth has rebounded since its 2020 lows, but momentum Private domestic demand recovered as well, while strong net
stalled in 2021Q2 following a severe COVID-19 Delta exports continued given strong pandemic-related external
wave. demand.
The export-oriented manufacturing sector underpinned Exports remained strong, supported by external demand for
growth, while lockdown measures affected other sectors. pharmaceutical and electric equipment, but declined
somewhat in Q3 following lockdown measures.
Import volumes rebounded as investment sentiment The current account surplus narrowed relative to 2020
recovered, led by machinery, manufactured goods, and despite strong exports, as imports gradually recovered.
chemicals.

MALAYSIA
Figure 2. Malaysia: Inflation and Domestic Resource Constraints

Inflation remained contained in 2021 despite strong base ...while core inflation remained benign given slack in the
effects in Q2… economy and labor markets.
Producer prices increased reflecting a rebound in global

demand, higher commodity prices and supply …and industrial production resumed its recovery following a
disruptions… decline during the COVID wave in Q3.
Unemployment remained high as pandemic-prompted …while growth in manufacturing and services wages remains
lockdowns stalled growth in most sectors… modest.

MALAYSIA
Figure 3. Malaysia: Monetary Developments

The BNM maintained the policy rate at historical low while ...with the real policy rate and the real deposit entered
lending rates also remain low… negative territory but are close to zero.
Demand deposits and currency in circulation have picked

up after declining… ... partly driving a pick-up in broad money growth.
... while financial conditions have eased since the significant

Banking system deposits have picked up… tightening in early 2020.
Banking System Deposit & Repurchase Agreement Growth

(In y-o-y percent change)
10 10
9 9
8 8
7 7
6 6
5 5
4 4
3 3
2 2
Deposits & Repurchase Agreements of Individuals
1 1
All Deposits & Repurchase Agreements
0 0
-1 -1
Dec-15
Dec-19
Sep-15
Sep-16
Dec-16
Mar-17
Sep-17
Dec-17
Sep-18
Dec-18
Sep-19
Sep-20
Dec-20
Mar-21
Sep-21
Dec-21
Mar-15
Jun-15
Mar-16
Jun-16
Jun-17
Mar-18
Jun-18
Mar-19
Jun-19
Mar-20
Jun-20
Jun-21
Sources: Bank Negara Malaysia, CEIC Data, and IMF staff calculations.

MALAYSIA
Figure 4. Malaysia: Capital Flows
Capital flows returned in 2021… …as portfolio debt inflows persisted …
…resulting in an increase in foreign holdings of ringgit-

denominated government securities. BNM’s gross reserved steadily increased in 2021.
Real-effecting exchange rate appreciated in 2021H2, but

remains below pre-pandemic levels as the ringgit The stock market remained volatile and closed in modest
weakened vis-à-vis US dollar. losses in 2021.

MALAYSIA
Figure 5. Malaysia: Fiscal Policy Developments

The pandemic led to a large fiscal deficit in 2020 … while revenues continued their pre-pandemic weakening
and 2021 … trend.
Current expenditures increased, particularly on ...and development expenditure has been on rising trend
subsidies... since 2019.
Federal government deficit and debt levels have

continued rising in 2021 following the step increase Guarantees remain close to 20 percent of GDP after a sharp
in 2020. increase during the pandemic.

MALAYSIA
Figure 6. Malaysia: Public Sector Fiscal Stance and Prospects

Prior to the pandemic, the Non-Financial Public Sector
Public companies’ surpluses have been sustained.
(NFPS) deficit had been improving since 2015.
General government development spending has recently

...with Petronas’ share lower than before.
picked up…

MALAYSIA
Figure 7. Malaysia: Banking Sector Developments

Credit growth remains stable but credit has declined as a Credit to the private sector remains subdued but credit to
share of GDP as GDP partially recovered. households has increased.
The banking system remains well capitalized while non-

Corporate leverage compares favorably to peers.
performing loans remain low.
The banking system continues to rely on short-term

Banks’ net external asset position remains weak.
external debt.

MALAYSIA
Figure 8. Financial Soundness Indicators

Malaysian Banks remain with relatively strong capital …while liquidity continues to provide stronger cover for
buffers... short-term liabilities relative to peers.
Lending in proportion of deposits remains moderate and

…and asset quality remains high.
in line with peers…
…but profitability will be under pressure, partially

Banks remain profitable …
reflecting lower interest rate spreads.

MALAYSIA
Figure 9. Malaysia: Household Debt

Household debt as share of GDP moderates... …but remains high compared to ASEAN peers…
… and is above the levels observed in countries with

similar GDP per capita. Housing loans remained broadly stable.
Household non-performing loans after a decline on the ...and household financial assets increased in 2020 as
back of loan moratoria have picked up but remain low... share of GDP.

MALAYSIA
Figure 10. Malaysia: Residential Property Market

The price-to-income ratio has begun to stabilize after a
House prices have declined in Q3 2021.
surge on the back of the collapse in income in 2020Q2.
Although population growth is strong, this alone cannot

explain the rise in house prices relative to other Prices are falling in all segments of Kuala Lumpur.
countries.
Residential supply has been increasing… … as construction starts are on a recovery path.

MALAYSIA
Table 1. Malaysia: Selected Economic and Financial Indicators, 2017-27

Nominal GDP (2021): US$372.8 billion Population (2020): 32.6 million
GDP per capita (2021, current prices): US$10,350 Poverty rate (2019, national poverty line): 0.2 percent
Unemployment rate (2021, end-of-period): 4.2 percent Adult literacy rate (2019): 95.0 percent
Main domestic goods exports (share of total domestic exports, 2021): Machinery and Transport Equipment (39.2 percent), Miscellaneous Manufactured Articles (16.6 percent), and Manufactured
Goods (10.8 percent).
Est. Proj.
2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027
Real GDP (percent change) 5.8 4.8 4.4 -5.6 3.1 5.7 5.7 5.0 4.5 4.5 4.0
Consumption 6.7 7.1 6.6 -2.9 2.7 10.3 4.1 5.2 4.8 4.6 3.7
Private consumption 6.9 8.0 7.7 -4.3 1.9 13.9 5.7 5.3 5.4 5.3 4.2
Net exports (contribution to growth, percentage points) -0.3 0.4 0.7 -0.9 -0.4 -1.9 0.3 -0.4 -0.3 -0.2 0.0
Fiscal sector (in percent of GDP) 1/
Federal government overall balance -2.9 -3.7 -3.4 -6.2 -6.4 -6.1 -4.6 -4.4 -4.3 -4.2 -4.2
Revenue 16.1 16.1 17.5 15.9 14.3 14.1 13.6 13.6 13.5 13.5 13.5
Tax refunds (Arrears) 2/ 2.4
Federal government non-oil primary balance -3.4 -5.3 -6.7 -7.6 -6.6 -5.9 -4.0 -3.6 -3.3 -3.0 -2.9
Consolidated public sector overall balance 3/ -3.6 -2.9 -3.4 -7.0 -8.2 -8.6 -7.1 -6.8 -6.4 -6.2 -6.2
General government debt 3/ 54.4 55.6 57.1 67.8 69.0 70.6 69.9 69.9 69.8 69.6 69.5
Of which: federal government debt 50.0 51.2 52.4 62.1 63.4 65.0 64.3 64.3 64.2 63.9 63.8
Inflation and unemployment (annual average, in percent)
CPI inflation 3.7 1.0 0.7 -1.1 2.5 2.5 2.0 2.0 2.0 2.0 2.0
CPI inflation (excluding food and energy) 1.6 0.4 1.1 1.0 0.7 0.8 1.0 1.1 1.1 1.1 1.1
Unemployment rate 3.4 3.3 3.3 4.5 4.7 4.5 4.3 4.2 4.2 4.2 4.2
Macrofinancial variables (end of period)
Broad money (percentage change) 4/ 4.8 7.7 2.7 4.9 5.6 7.5 8.9 7.4 7.3 7.4 7.1
Credit to private sector (percentage change) 4/ 5.4 8.3 4.9 4.0 3.8 6.9 8.9 7.4 7.3 7.4 7.1
Credit-to-GDP ratio (in percent) 5/ 6/ 126.6 130.0 130.4 144.9 138.0 137.2 137.2 137.2 137.2 137.2 137.2
Overnight policy rate (in percent) 3.00 3.25 3.00 1.75 1.75 … … … … … …
Three-month interbank rate (in percent) 3.5 3.6 3.3 1.9 2.0 … … … … … …
Nonfinancial corporate sector debt (in percent of GDP) 7/ 101.3 102.6 99.1 109.8 108.0 … … … … … …
Nonfinancial corporate sector debt issuance (in percent of GDP) 3.3 2.0 1.8 2.3 2.6 … … … … … …
Household debt (in percent of GDP) 7/ 82.6 82.0 82.7 93.2 … … … … … … …
Household financial assets (in percent of GDP) 7/ 176.4 175.7 179.0 205.0 … … … … … … …
House prices (percentage change) 6.1 2.5 1.8 1.2 … … … … … … …
Exchange rates (period average)
Malaysian ringgit/U.S. dollar 4.30 4.03 4.14 4.19 4.14 … … … … … …
Real effective exchange rate (percentage change) -1.6 4.1 -1.3 -3.6 -0.3 … … … … … …
(In percent of GDP) 2.8 2.2 3.5 4.2 3.5 3.4 3.3 3.2 3.1 3.0 3.0
Goods balance 27.2 28.4 30.1 33.0 41.1 49.4 52.0 53.3 55.1 59.0 69.1
Income balance -13.0 -16.1 -14.7 -7.4 -13.4 -18.9 -18.7 -17.5 -16.0 -16.0 -16.8
Of which: Direct investment 3.8 2.5 1.6 0.7 7.9 6.9 7.2 7.3 7.4 7.6 8.0
Overall balance 3.8 1.9 2.0 -4.6 11.0 9.7 3.6 1.5 0.5 1.3 1.5
Gross official reserves (US$ billions) 5/ 8/ 102.4 101.4 103.6 107.6 116.9 126.6 130.2 131.7 132.2 133.5 135.0
(In months of following year's imports of goods and nonfactor services) 5.5 5.8 6.7 5.6 5.4 5.7 5.7 5.6 6.2 6.7 7.3
(In percent of short-term debt by original maturity) 117.8 103.4 108.8 117.7 123.8 117.6 120.9 112.4 107.0 101.9 94.4
(In percent of short-term debt by remaining maturity) 93.7 84.6 87.2 92.0 95.4 92.4 94.0 86.8 83.6 79.7 94.4
(In percent of GDP) 68.5 62.3 63.4 70.7 68.9 68.1 63.4 63.1 61.5 60.4 59.8
Of which: short-term (in percent of total, original maturity) 39.7 43.9 41.1 38.4 36.8 38.9 37.8 38.3 38.3 38.4 39.4
short-term (in percent of total, remaining maturity) 50.0 53.6 51.3 49.1 47.8 49.5 48.6 49.6 49.0 49.1 39.4
Debt service ratio 5/
(In percent of exports of goods and services) 9/ 14.0 10.6 10.9 13.6 10.8 10.3 10.5 11.3 12.0 12.4 12.6
Memorandum items:
Sources: Data provided by the authorities; CEIC Data; World Bank; UNESCO; and IMF, Integrated Monetary Database, and staff estimates.
1/ Cash basis. The authorities are planning to adopt accrual basis. For 2019, overall and primary balance includes the payment of outstanding tax refund (arrears) amounting to RM37 billion.
3/ Consolidated public sector includes general government and nonfinancial public enterprises (NFPEs). General government includes federal government, state and local governments, and statutory
bodies.
4/ Based on data provided by the authorities, but follows compilation methodology used in IMF's Integrated Monetary Database . Credit to private sector in 2018 onwards includes data for a newly
licensed commercial bank from April 2018. The impact of this bank is excluded in the calculation of credit gap.
6/ Based on a broader measure of liquidity. Credit gap is estimated on quarterly data from 2000, using one-sided Hodrick-Prescott filter with a large parameter.
7/ Revisions in historical data reflect the change in base year for nominal GDP (from 2010=100 to 2015=100).
8/ The decrease in short-term debt by remaining maturity in 2017 was partly due to the implementation of an improved data compilation system that corrected previous overestimation.

MALAYSIA
Table 2. Malaysia: Indicators of External Vulnerability, 2017–21
2017 2018 2019 2020 2021 1/
Financial indicators
General government debt (in percent of GDP) 2/ 54.4 55.6 57.1 67.8 69.0
Broad money (end of period, year-on-year percent change) 3/ 4.8 7.7 2.7 4.9 5.6
Private sector credit (end of period, year-on-year percent change) 3/ 5.4 8.3 4.9 4.0 3.8
3-month interest rate (percent, 12-month average) 4/ 3.4 3.7 3.5 2.6 2.3
External indicators 5/
Goods exports, f.o.b. (percent change, 12-month basis, in U.S. dollars terms) 6/ 12.3 10.4 -4.1 -6.2 27.4
Goods imports, f.o.b. (percent change, 12-month basis, in U.S. dollars terms) 6/ 12.7 11.5 -5.7 -9.0 28.1
Current account balance (12-month basis, in billions of U.S. dollars) 6/ 8.9 8.0 12.8 14.3 12.9
Current account balance (12-month basis, in percent of GDP) 2.8 2.2 3.5 4.2 3.5
Capital and financial account balance (12-month basis, in billions of U.S. dollars) 6/ -1.1 2.8 -9.1 -18.2 7.0
Gross official reserves (in billions of U.S. dollars) 102.4 101.4 103.6 107.6 116.9
In months of following year's imports of goods and nonfactor services 6/ 5.5 5.8 6.7 5.6 5.4
As percent of broad money 3/ 6/ 24.7 23.1 22.8 22.2 23.7
As percent of monetary base 3/ 6/ 281.2 269.3 271.9 271.0 297.8
Total short-term external debt by: 6/ 7/

Original maturity (in billions of U.S. dollars) 86.9 98.1 95.2 91.5 94.4
Remaining maturity (in billions of U.S. dollars) 109.3 119.9 118.9 117.0 122.5
Original maturity to reserves (in percent) 84.9 96.7 91.9 85.0 80.8
Original maturity to total external debt (in percent) 39.7 43.9 41.1 38.4 36.8
Remaining maturity to reserves (in percent) 106.7 118.2 114.7 108.7 104.8
Remaining maturity to total external debt (in percent) 50.0 53.6 51.3 49.1 47.8
Total external debt (in billions of U.S. dollars) 6/ 7/ 218.8 223.5 231.5 238.5 256.4
Of which: public sector (medium- and long-term (MLT)) 77.9 71.8 76.0 85.6 93.4
Total external debt to exports of goods and services (in percent) 6/ 8/ 92.7 85.6 91.1 108.4 91.9
External amortization of MLT debt to exports of goods and services (in percent) 6/ 8/ 12.4 8.6 8.6 10.8 9.2
Financial market indicators

Kuala Lumpur Composite Index (KLCI), end of period 1,797 1,691 1,589 1,627 1,568
10-year government securities yield (percent per annum, average) 4.0 4.1 3.6 2.8 3.3
Sources: Haver Analytics; CEIC Data Co. Ltd.; data provided by the authorities; and IMF, Integrated Monetary Database and staff estimates.
1/ Latest available data or IMF staff estimates.
2/ Gross debt. General government includes the federal government, state and local governments, and the statutory bodies.
3/ Based on data provided by the authorities, but follows compilation methodology used in IMF's Integrated Monetary Database.
4/ Kuala Lumpur interbank offer rate.
5/ Based on balance of payments.
7/ Includes offshore borrowing, nonresident holdings of ringgit-denominated securities, nonresident deposits, and other short-term debt.

MALAYSIA
Table 3. Malaysia: Balance of Payments, 2017–27 1/
Est. Proj.
2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027
(In billions of U.S. dollars)
Goods balance 27.2 28.4 30.1 33.0 41.1 49.4 52.0 53.3 55.1 59.0 69.1
Exports, f.o.b. 186.4 205.8 197.3 185.2 235.9 266.9 275.3 279.7 284.2 290.7 308.2
Imports, f.o.b. 159.2 177.4 167.2 152.1 194.9 217.5 223.4 226.4 229.1 231.6 239.1
Receipts 37.1 40.3 41.1 22.0 20.9 23.2 26.0 29.4 33.3 38.0 40.1
Payments 42.4 44.6 43.7 33.3 35.6 40.0 44.4 49.7 56.1 64.1 74.0
Primary income -9.0 -11.2 -9.5 -6.8 -11.1 -12.0 -11.7 -10.8 -9.8 -8.8 -8.5
Secondary income -4.0 -4.9 -5.2 -0.6 -2.3 -6.8 -7.1 -6.7 -6.2 -7.2 -8.4
Capital account 0.0 0.0 0.1 -0.1 -0.2 0.0 0.0 0.0 0.0 0.0 0.0
Financial account -1.1 2.8 -9.2 -18.1 7.2 -4.1 -11.2 -13.9 -15.8 -15.6 -17.0
Direct investment 3.8 2.5 1.6 -0.8 4.7 6.9 7.2 7.3 7.4 7.6 8.0
Portfolio investment -3.6 -12.2 -7.0 -11.7 4.6 2.4 3.4 2.5 -0.5 0.8 -2.5
Other investment -1.3 12.54 -3.8 -5.6 -2.1 -13.5 -21.8 -23.7 -22.7 -24.0 -22.5
Overall balance 3.8 1.9 2.0 -4.6 11.0 9.7 3.6 1.5 0.5 1.3 1.5
Gross official reserves 102.4 101.4 103.6 107.6 116.9 126.6 130.2 131.7 132.2 133.5 135.0
In months of following year's imports of goods 5.5 5.8 6.7 5.6 5.4 5.7 5.7 5.6 6.2 6.7 7.3
and nonfactor services
In percent of short-term debt 2/ 3/ 93.7 84.6 87.2 92.0 95.4 92.4 94.0 86.8 83.6 79.7 94.4
(In percent of GDP)
(Excluding crude oil and liquefied natural gas) -0.9 -1.5 0.8 2.3 0.9 0.1 1.2 1.3 1.3 1.3 1.4
Goods balance 8.5 7.9 8.2 9.8 11.0 12.1 11.5 11.0 10.5 10.4 11.4
Exports, f.o.b. 58.4 57.3 54.0 54.9 63.3 65.6 61.1 57.5 54.1 51.3 50.7
Imports, f.o.b. 49.9 49.4 45.8 45.1 52.3 53.5 49.6 46.6 43.6 40.9 39.3
Primary income -2.8 -3.1 -2.6 -2.0 -3.0 -3.0 -2.6 -2.2 -1.9 -1.6 -1.4
Secondary income -1.3 -1.4 -1.4 -0.2 -0.6 -1.7 -1.6 -1.4 -1.2 -1.3 -1.4
Direct investment 1.2 0.7 0.4 -0.3 1.3 1.7 1.6 1.5 1.4 1.3 1.3
(Annual percentage change)
Memorandum items:
Goods trade
Exports, f.o.b., value growth (in U.S. dollars) 1/ 12.3 10.4 -4.1 -6.2 27.4 13.1 3.2 1.6 1.6 2.3 6.0
Export volume growth 4/ 11.1 5.5 -1.6 1.4 14.4 1.3 4.2 3.7 3.9 3.8 3.7
Imports, f.o.b., value growth (in U.S. dollars) 1/ 12.7 11.5 -5.7 -9.0 28.1 11.6 2.7 1.4 1.2 1.1 3.2
Import volume growth 4/ 12.9 3.1 -3.2 -2.8 18.6 6.0 5.4 4.9 4.1 4.1 3.8
Terms of trade 1.1 -0.4 1.1 -3.8 6.3 0.8 -0.5 0.1 0.1 0.1 0.0
Net international investment position 1/

(In billions of U.S. dollars) -7.5 -17.6 -9.5 16.8 21.8 … … … … … …
(In percent of GDP) -2.4 -4.9 -2.6 5.0 5.8 … … … … … …
Sources: Data provided by the authorities; and IMF staff estimates.
1/ Information presented in this table is based on staff estimates using official data published in national currency.
2/ Based on IMF staff estimates of short-term external debt by remaining maturity.
3/ The decrease in short-term debt by remaining maturity in 2017 was partly due to the implementation of an improved data compilation system that
corrected previous overestimation.
4/ Export and import volume growth in 2015-2018 is calculated using official export and import volume indices (2010=100).

MALAYSIA
Table 4. Malaysia: Medium-Term Macroeconomic Framework, 2017–27 1/

Est. Proj.
2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027
Real sector (percent change)

Real GDP growth 5.8 4.8 4.4 -5.6 3.1 5.7 5.7 5.0 4.5 4.5 4.0
Of which: Private consumption 6.9 8.0 7.7 -4.3 1.9 13.9 5.7 5.3 5.4 5.3 4.2
Output gap (in percent) 2/ 0.8 0.6 0.1 -4.6 -3.8 -3.6 -2.2 -1.5 -1.1 -0.7 0.0
Consumer prices (period average) 3.7 1.0 0.7 -1.1 2.5 2.5 2.0 2.0 2.0 2.0 2.0
Consumer prices, excluding food and energy (period average) 2/ 1.6 0.4 1.1 1.0 0.7 0.8 1.0 1.1 1.1 1.1 1.1
GDP deflator 3.8 0.6 0.1 -0.8 5.7 1.7 3.0 2.3 2.7 2.8 3.0
Private, including stocks 17.6 16.7 14.8 14.5 17.9 12.4 14.8 15.6 16.4 17.2 18.1
Of which: gross fixed capital formation 17.1 17.0 16.7 15.7 15.0 17.3 17.6 18.0 18.5 18.8 19.2
Public 8.0 7.2 6.2 5.2 4.3 4.5 4.5 4.5 4.6 4.6 4.6
Private 3/ 22.1 18.9 16.5 19.9 22.2 17.0 19.2 19.8 20.6 21.3 22.2
Public 3/ 6.2 7.2 8.0 4.0 3.6 3.4 3.5 3.5 3.5 3.5 3.5
Fiscal sector (in percent of GDP)
Federal government
Revenue 16.1 16.1 17.5 15.9 14.3 14.1 13.6 13.6 13.5 13.5 13.5
Tax 12.9 12.0 11.9 10.9 10.5 10.3 10.0 10.0 9.9 9.9 9.9
Nontax 3.1 4.1 5.5 5.0 3.8 3.8 3.6 3.6 3.6 3.6 3.6
Current 15.8 15.9 14.9 18.4 16.6 15.5 13.6 13.5 13.5 13.5 13.4
Development 3.2 3.9 3.5 3.7 4.1 4.7 4.7 4.5 4.3 4.3 4.3
Overall balance -2.9 -3.7 -3.4 -6.2 -6.4 -6.1 -4.6 -4.4 -4.3 -4.2 -4.2
Cyclically-adjusted balance (in percent of potential GDP) 2/ -3.0 -4.8 -3.0 -4.8 -6.0 -5.8 -4.4 -4.3 -4.1 -4.1 -4.1
Nonoil and gas primary balance -3.4 -5.3 -6.7 -7.6 -6.6 -5.9 -4.0 -3.6 -3.3 -3.0 -2.9
Federal government debt 50.0 51.2 52.4 62.1 63.4 65.0 64.3 64.3 64.2 63.9 63.8

Goods balance 27.2 28.4 30.1 33.0 41.1 49.4 52.0 53.3 55.1 59.0 69.1
Income balance -13.0 -16.1 -14.7 -7.4 -13.4 -18.9 -18.7 -17.5 -16.0 -16.0 -16.8
(In percent of GDP) 2.8 2.2 3.5 4.2 3.5 3.4 3.3 3.2 3.1 3.0 3.0
Of which : Direct investment 3.8 2.5 1.6 0.7 7.9 6.9 7.2 7.3 7.4 7.6 8.0
Overall balance 3.8 1.9 2.0 -4.6 11.0 9.7 3.6 1.5 0.5 1.3 1.5
International trade in goods (annual percent change) 2/
Goods exports, f.o.b. (in U.S. dollars terms) 12.3 10.4 -4.1 -6.2 27.4 13.1 3.2 1.6 1.6 2.3 6.0
Goods imports, f.o.b. (in U.S. dollars terms) 12.7 11.5 -5.7 -9.0 28.1 11.6 2.7 1.4 1.2 1.1 3.2
Terms of trade 1.1 -0.4 1.1 0.6 6.0 5.8 1.7 1.5 0.0 1.4 3.0
Gross official reserves (in billions of U.S. dollars) 3/ 102.4 101.4 103.6 107.6 116.9 126.6 130.2 131.7 132.2 133.5 135.0
(In months of following year's imports of goods and nonfactor services) 5.5 5.8 6.7 5.6 5.4 5.7 5.7 5.6 6.2 6.7 7.3
(In percent of short-term debt by original maturity) 2/ 117.8 103.4 108.8 117.7 123.8 117.6 120.9 112.4 107.0 101.9 94.4
(In percent of short-term debt by remaining maturity) 2/ 93.7 84.6 87.2 92.0 95.4 92.4 94.0 86.8 83.6 79.7 94.4
(In percent of GDP) 68.5 62.3 63.4 70.7 68.8 68.0 63.3 63.0 61.4 60.3 59.7
Short-term external debt (percent of total, original maturity) 39.7 43.9 41.1 38.4 36.8 38.9 37.8 38.3 38.3 38.4 39.4
Short-term external debt (percent of total, remaining maturity) 50.0 53.6 51.3 49.1 47.8 49.5 48.6 49.6 49.0 49.1 39.4
Debt-service ratio 2/ 3/
Net international investment position (in billions of U.S. dollars) 2/ -7.5 -17.6 -9.5 16.8 21.8 … … … … … …
Memorandum items:
Sources: Data provided by the authorities; and IMF staff estimates.

1/ Period ending December 31.
2/ IMF staff estimates. U.S. dollar values are estimated using the official data published in national currency.
3/ The decrease in short-term debt by remaining maturity in 2017 was partly due to the implementation of an improved data compilation system that corrected previous
overestimation.

MALAYSIA
Table 5. Malaysia: Summary of Federal Government Operations and Stock Positions, 2017–27
Proj.
2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027
I. Statement of Government Operations 1/ (In billions of ringgit)

Revenue 220.4 232.9 264.4 225.1 221.0 234.0 246.6 263.8 282.0 302.8 323.8
Taxes 177.7 174.1 180.6 154.4 161.8 171.4 180.7 193.2 206.4 221.7 237.1
Direct taxes 116.0 130.0 134.7 112.5 120.0 127.3 134.8 144.3 154.4 163.6 178.5
Indirect taxes 61.6 44.0 45.8 41.9 41.8 44.0 45.9 48.9 52.1 58.1 58.6
Non-tax revenue 42.7 58.8 83.8 70.7 59.2 62.6 65.9 70.6 75.6 81.1 86.7
Investment income 21.6 31.9 60.1 48.7 36.0 39.5 41.9 45.0 48.3 51.9 55.6
Other revenue 21.1 26.9 23.8 22.0 23.2 23.2 24.0 25.6 27.3 29.2 31.2
Current expenditure, including COVID fund 217.2 230.5 225.6 261.3 256.9 257.1 245.5 262.0 280.3 300.7 321.7
Expense 230.5 225.6 226.1 219.2 236.1 245.5 262.0 280.3 300.7 321.7
Compensation of employees 77.0 80.0 80.5 83.0 84.5 86.5 92.0 97.8 104.0 110.6 117.6
Use of goods and services 34.7 35.3 31.5 29.3 23.3 30.4 26.6 28.3 30.1 32.0 34.0
Interest 27.9 30.5 32.9 34.5 39.0 46.3 53.1 60.1 67.3 75.1 82.5
Subsidies and social assistance 22.4 27.5 23.9 19.8 16.7 17.4 14.7 12.9 11.9 11.3 11.2
Grants and transfers 31.3 30.9 66.0 28.9 27.6 27.2 29.3 31.2 33.2 35.7 38.2
Social benefits and other expense 23.8 26.3 -9.4 30.6 28.1 28.4 29.8 31.7 33.8 35.9 38.2
COVID fund 2/ 35.2 37.7 21.0
Wage subsidies 13.0 9.7 3.0
Social transfers 16.2 16.8 8.0
Other spending 6.0 11.2 10.0
Net acquisition of nonfinancial assets (incl. COVID spending) 3/ 43.5 55.8 53.3 52.5 63.3 77.5 84.4 87.8 90.4 95.2 102.0
Gross operating balance 3.2 2.4 38.8 -1.0 1.8 -2.1 1.1 1.8 1.8 2.1 2.1
Net lending/borrowing -40.3 -53.4 -14.5 -88.7 -99.2 -100.7 -83.4 -86.0 -88.7 -93.1 -99.9
Tax refunds (Arrears) 4/ -37.0
Overall fiscal balance (authorities' definition) 1/ -40.3 -53.4 -51.5 -88.4 -98.8 -100.7 -83.4 -86.0 -88.7 -93.1 -99.9
(In percent of GDP)
Revenue 16.1 16.1 17.5 15.9 14.3 14.1 13.6 13.6 13.5 13.5 13.5
Taxes 12.9 12.0 11.9 10.9 10.5 10.3 10.0 10.0 9.9 9.9 9.9
Direct taxes 8.5 9.0 8.9 7.9 7.8 7.7 7.5 7.4 7.4 7.3 7.4
Indirect taxes 4.5 3.0 3.0 3.0 2.7 2.7 2.5 2.5 2.5 2.6 2.4
Non-tax revenue 3.1 4.1 5.5 5.0 3.8 3.8 3.6 3.6 3.6 3.6 3.6
Investment income 1.6 2.2 4.0 3.4 2.3 2.4 2.3 2.3 2.3 2.3 2.3
Other revenue 1.5 1.9 1.6 1.6 1.5 1.4 1.3 1.3 1.3 1.3 1.3
Current expenditure, including COVID fund 38.4 15.9 14.9 18.4 16.6 15.5 13.6 13.5 13.5 13.4 13.4
Expense 15.8 15.9 14.9 16.0 14.2 14.2 13.6 13.5 13.5 13.4 13.4
Compensation of employees 5.6 5.5 5.3 5.9 5.5 5.2 5.1 5.0 5.0 4.9 4.9
Use of goods and services 2.5 2.4 2.1 2.1 1.5 1.8 1.5 1.5 1.4 1.4 1.4
Interest 2.0 2.1 2.2 2.4 2.5 2.8 2.9 3.1 3.2 3.4 3.4
Subsidies and social assistance 1.6 1.9 1.6 1.4 1.1 1.0 0.8 0.7 0.6 0.5 0.5
Grants and transfers 2.3 2.1 4.4 2.0 1.8 1.6 1.6 1.6 1.6 1.6 1.6
Social benefits and other expense 1.7 1.8 -0.6 2.2 1.8 1.7 1.7 1.6 1.6 1.6 1.6
COVID fund 2/ 2.5 2.4 1.3
Wage subsidies 0.9 0.6 0.2
Social transfers 1.1 1.1 0.5
Other spending 0.4 0.7 0.6
Net acquisition of nonfinancial assets (incl. COVID spending) 3/ 3.2 3.9 3.5 3.7 4.1 4.7 4.7 4.5 4.3 4.3 4.3
Gross operating balance 0.2 0.2 2.6 -0.1 0.1 -0.1 0.1 0.1 0.1 0.1 0.1
Net lending/borrowing -2.9 -3.7 -1.0 -6.3 -6.4 -6.1 -4.6 -4.4 -4.3 -4.2 -4.2
Tax refunds (Arrears) 4/ -2.4
Overall fiscal balance (authorities' definition) 1/ -2.9 -3.7 -3.4 -6.2 -6.4 -6.1 -4.6 -4.4 -4.3 -4.2 -4.2
II. Stock Positions (In billions of ringgit)
Federal government debt 686.8 741.1 793.0 879.6 978.3 1,079.0 1,162.4 1,248.4 1,337.0 1,430.2 1,530.0
(In percent of GDP) 50.0 51.2 52.4 62.1 63.4 65.0 64.3 64.3 64.2 63.9 63.8
Memorandum items:
Structural balance (in billions of ringgit) 5/ -41.6 -69.5 -44.7 -68.0 -92.1 -96.9 -79.5 -82.5 -85.7 -91.0 -99.6
Structural balance (percent of potential GDP) 5/ -3.1 -4.8 -3.0 -4.6 -5.7 -5.6 -4.3 -4.2 -4.1 -4.0 -4.2
Structural primary balance (percent of potential GDP) 5/ -1.0 -2.7 -0.8 -2.3 -3.3 -2.9 -1.4 -1.1 -0.9 -0.7 -0.7
Primary balance (percent of GDP) -0.9 -1.6 -1.2 -3.8 -3.9 -3.3 -1.7 -1.3 -1.0 -0.8 -0.7
Nonoil and gas primary balance (percent of GDP) 5/ -3.4 -5.3 -6.7 -7.6 -6.6 -5.9 -4.0 -3.6 -3.3 -3.0 -2.9
Oil and gas revenues (percent of GDP) 2.5 3.8 5.5 3.8 2.8 2.6 2.3 2.3 2.3 2.2 2.2
General government debt (percent of GDP) 6/ 54.4 55.7 57.2 67.9 69.0 70.6 69.9 69.9 69.8 69.5 69.4
General government balance (percent of GDP) 6/ -2.4 -2.6 -2.0 -4.6 -5.5 -5.0 -3.5 -3.3 -3.1 -3.0 -3.0
Public sector balance (percent of GDP) -3.6 -2.9 -3.4 -7.0 -8.2 -8.6 -7.1 -6.8 -6.4 -6.2 -6.2
Sources: Data provided by the Malaysian authorities; and IMF staff estimates.
1/ Cash basis. The authorities plan to adopt accrual basis by 2021.

2/ The authorities established a dedicated COVID-19 trust fund where they channeled proceeds from borrowing needed to finance the additional spending on COVID-19 relief measures. All such
expenditures are appropriated through the fund.
3/ Net acquisition of nonfinancial assets include lending and loan repayment to and from other government related entities. In 2020, it includes RM4bln of COVID-related projects.
5/ Structural (primary) balance removes one-off revenues and tax refunds in 2019, while nonoil and gas primary balance does not exclude tax refunds in 2019.
6/ General government includes federal government, state and local governments, and statutory bodies. Public sector includes general government and nonfinancial public enterprises.

MALAYSIA
Table 6. Malaysia: Depository Corporations, 2017–21 1/
2017 2018 2019 2020 2021
(In billions of ringgit; end of period)
Net foreign assets 333.1 306.1 287.3 312.1 356.0

Foreign assets 583.4 584.0 582.8 601.0 661.3
Foreign liabilities 250.3 277.9 295.5 289.0 305.4
Net domestic assets 1,359.6 1,518.4 1,585.7 1,651.4 1,715.8

Net domestic credit 1,857.1 2,026.7 2,118.8 2,249.1 2,349.8
Net credit to nonfinancial public sector 161.7 195.0 197.5 250.5 278.3
Net credit to central government 144.4 170.9 173.4 226.8 254.4
Net credit to state & local government 1.9 1.9 1.9 1.4 1.7
Net credit to nonfinancial corporations 15.4 22.1 22.2 22.2 22.3
Credit to private sector 2/ 1,607.6 1,741.2 1,825.8 1,898.0 1,970.3
Net credit to other financial corporations 87.8 90.6 95.4 100.6 101.1
Capital accounts 423.2 439.4 473.2 515.6 540.4
Other items (net) -74.3 -68.9 -64.1 -85.4 -92.1
Broad money 3/ 1,681.5 1,810.8 1,859.3 1,949.7 2,058.1

Narrow money 449.9 454.1 479.9 556.1 626.0
Currency in circulation 92.4 94.3 100.2 117.7 136.5
Transferable deposits 357.5 359.8 379.8 438.4 489.5
Other deposits 1,199.4 1,314.0 1,343.2 1,361.0 1,403.8
Securities other than shares 32.2 42.7 36.1 32.6 28.3
(Contributions to 12-month growth in broad money, in percentage points)
Net foreign assets -1.8 -1.6 -1.0 1.3 2.3

Net domestic assets 6.6 9.4 3.7 3.5 3.3
Memorandum items:
Broad money (12-month percent change) 4.8 7.7 2.7 4.9 5.6
Currency in circulation (12-month percent change) 8.1 2.1 6.2 17.5 16.0
Credit to private sector (12-month percent change) 5.4 8.3 4.9 4.0 3.8
Money multiplier (broad money/narrow money) 3.7 4.0 3.9 3.5 3.3
Sources: Data provided by the Malaysian authorities; and IMF, Integrated Monetary Database and staff calculations.
1/ Based on data provided by the authorities, but follows compilation methodology used in IMF's Integrated Monetary Database.
2/ Actual data as provided by the Malaysian monetary authorities in the Integrated Monetary Database.
3/ Broad money does not equal the sum of net foreign assets and net domestic assets due to non-liquid liabilities, primarily at the
other depository corporations.

MALAYSIA
Table 7. Malaysia: Banks' Financial Soundness Indicators, 2017–2021Q3
2017 2018 2019 2020 2021Q3
(In percent; end of period)

Capital adequacy
Regulatory capital to risk-weighted assets 17.8 18.1 18.6 18.9 18.2
Regulatory Tier 1 capital to risk-weighted assets 15.0 14.6 15.1 15.7 14.9
Asset quality
Nonperforming loans net of provisions to capital 1/ 6.2 4.8 5.0 5.1 5.2
Nonperforming loans to total gross loans 1.5 1.5 1.5 1.6 1.6
Earnings and profitability
Return on assets 1.4 1.4 1.5 1.1 1.2
Return on equity 13.1 12.6 12.9 9.2 10.8
Interest margin to gross income 61.1 61.0 57.8 58.1 60.5
Non-interest expenses to gross income 43.2 42.0 42.3 42.5 44.6
Liquidity
Liquid assets to total assets (liquid asset ratio) 22.0 21.9 21.6 22.0 23.3
Liquid assets to short-term liabilities 138.3 143.2 149.1 148.2 154.4
Loan to fund ratio 83.9 83.1 83.2 82.5 80.7
Liquidity coverage ratio 134.9 143.2 149.1 148.2 154.4
Sensitivity to market risk
Net open position in foreign exchange to capital 6.1 5.5 4.2 5.2 4.9
Sectoral distribution of total loans to nonbanking sector
Residents 97.0 97.0 97.5 97.4 97.2
Other financial corporations 3.3 3.2 3.5 3.4 3.5
General government 1.9 2.0 1.8 1.8 1.7
Nonfinancial corporations 35.9 35.5 35.4 34.4 34.5
Other domestic sectors 56.0 56.3 56.9 57.9 57.5
Nonresidents 3.0 3.0 2.5 2.6 2.8
Sources: Bank Negara Malaysia; and IMF, Financial Soundness Indicators database.
1/ Loans are classified as nonperforming if payments are overdue for three months or more. Total loans include housing loans sold to Cagamas
Berhad. Net nonperforming loans exclude interest-in-suspense and specific provisions. There is a methodology change since 2018 following the
implementation of Malaysian Financial Reporting Standards (MFRS) 9.

MALAYSIA
Appendix I. The Financial Sector Blueprint: 2022-20261

The recently launched Bank Negara Malaysia’s Financial Sector Blueprint (2022-2026) strategy focuses
on fostering financial inclusion, economic transformation, and a sustainable economy.
1. Financial policies were supportive of the economy during the COVID-19 pandemic. The
Fund for small and medium enterprises (SMEs) was enhanced by RM4.5 billion, bringing the total
available funds as of mid-September 2021 to RM11.2 billion. Additional facilities were provided
following the 2022 budget announcement. Furthermore, under the enhanced Targeted Relief and
Recovery Facility, SMEs can now utilize up to 30 percent of the approved financing to repay existing
business financing.2 In addition, a six-month loan moratorium available to all individuals (B40, M40
and T20), microenterprises, and affected SMEs was established effective July 7, 2021.
2. The financial sector features prominently in the 12MP. The 12MP recognizes the role of
the financial sector in channeling resources to the productive sectors of the economy in order to
foster a sustained growth in Malaysia. The financial sector blueprint documents the strategic
orientation for the sector over the next five years.
3. The Blueprint identifies five strategic thrusts to foster financial inclusion, economic
transformation, and a sustainable economy3:
• Fund Malaysia’s economic transformation – through continued support to the recovery of the
economy, regulatory actions to promote the aspiration of becoming a high-income country and
enhancing the intermediation role of domestic financial markets.
• Elevate the financial well-being of households and businesses – through the improvement of
financial inclusion by providing access including through mobile banking, strengthening financial
resilience for both household and the corporate sectors, and enhancing financial ethics.
• Advance digitalization of the financial sector – through the digital infrastructure dedicated to
improving digital financial services, cybersecurity risk management, and regulatory practices.
• Position the financial system to facilitate an orderly transition to a greener economy – through the
integration of climate risks both in BNM’s internal processes and, in its supervisory and
prudential regulatory roles, and the support of an orderly and just transition to a low-carbon
economy.
• Advance value-based finance through Islamic finance leadership – through positioning Malaysia as
an international gateway for Islamic finance, enhancing policy enablers of value-based finance
and promoting the social finance aspect of Islamic finance.
1
Prepared by Kodjovi Eklou.
2
Refinancing of existing business financing under BNM’s Fund for SMEs is not allowed.
3
The financial sector blueprint can be found here.

MALAYSIA
Appendix II. Public Debt Sustainability Analysis1

Malaysia started the pandemic with at-risk fiscal space. The two successive temporary increases in its
debt ceiling by a total of 10 percentage points as well as ample liquidity in the domestic markets
allowed stepped-up support for the economy amid the 2021 Delta-variant outbreak. However, fiscal
space remains at risk and there is a need to start rebuilding space once the recovery is entrenched.
Under current policies, Malaysia’s federal government debt remains sustainable and is projected to
stabilize at around 64 percent of GDP in the medium term. Existing pre-COVID vulnerabilities, such as
sizable external financing requirements and large contingent liabilities, exacerbate sustainability risks.
A credible medium-term consolidation plan is required to put the debt on a clear downward trend path
and ensure fiscal sustainability.
1. Baseline macro-fiscal assumptions. The macroeconomic and policy assumptions follow the
team’s baseline projections. In 2021, the economy is recovering from the COVID-19-induced
slowdown and expand at 3.1/9 percent in real/nominal terms. The recovery will firm up in 2022 with
real growth projected at 5.7 percent. The fiscal deficit, which increased to 6.2 percent of GDP in 2020
is expected to widen to 6.4 percent in 2021 as the authorities appropriately continued supporting the
economy amid the worst Delta-variant outbreak in the second half 2021. Under current policies, the
deficit is expected to decrease to 6.1 percent in 2022 and average at 5 percent of GDP over 2022-24,
as per the authorities’ target, but will remain at 4.3 percent in 2025, significantly above the
authorities’ 12th Malaysia Plan (12MP) target of 3 to 3.5 percent of GDP.
2. Financing needs. Under the baseline scenario, Malaysia’s gross financing needs (defined as
the sum of the fiscal deficit and maturing debt) are projected to stand at 11.4 percent of GDP in 2021
and to decline to 10.8 in 2022, and to decline towards the pre-2020 average by 2026.
3. Debt profile vulnerabilities. Debt in the DSA is based on the federal government budget,
consistent with the data on government debt reported by the authorities. This definition of debt
covers more than 90 percent of general government debt. However, it does not include local and
state governments and statutory bodies which typically receive explicit government guarantees.
Malaysia’s standing on the debt profile vulnerabilities assessed in the MAC-DSA is as follows, with
the first two assessed as high risk (Heat Map)
• While majority of the debt is issued at long maturities, the share of T-Bill issuance has recently
increased and the annual change in short-term public debt this year slightly exceeded (at
1.2 percent) the upper threshold of early warning benchmark of 1 percent.
• The share of debt held externally is moderately high at 26 percent of total debt, above the lower
threshold of early warning benchmarks. However, about 90 percent of external debt is in local
currency, and the deep and liquid domestic debt market and the existence of large domestic
1
Prepared by Ghada Fayad.

MALAYSIA
institutional investors who tend to make opportunistic investments is a mitigating factor of this
risk.
• The share of debt denominated in foreign currency is very low at 3 percent of total debt.
• Market perception remains favorable with bond spreads below the lower MAC-DSA threshold
of 200 bps.
• The external financing requirement is high at 31 percent of GDP in 2020, and is above the upper
threshold of early warning benchmarks, though it has been on a decreasing trend and there are
several mitigating factors to this vulnerability as discussed in Appendix X.
4. Debt limit. The issuances and management of Malaysia’s federal government debt are
governed under several legislations according to the types of instruments.
• First, a domestic debt ceiling is defined for three types of instruments: Malaysia Government
Securities (MGS), Malaysia Government Investment Issues (MGII), and Malaysia Islamic Treasury
Bills (MITBs) taken together. The debt limit for MGS+MGII+MITBs has been raised in 2020
and 2021 from 55 percent of GDP to 60 then to 65 percent of GDP, initially to allow for increased
borrowing to finance COVID-related spending, but in 2021 the increase was also linked to the
planned scaling-up of public investment as per the 12th Malaysia Plan. It is worth noting that the
previous increases in Malaysia’s debt ceiling from 40 percent in 2003 to 45 percent in 2008, and
to 55 percent in 2009 were indeed all permanent.
• Second, the debt limit for the Malaysia Treasury Bills (MTBs) and offshore borrowing stands at
RM10 billion and RM35 billion, respectively, and has not been amended.
• The debt ceiling for federal government debt, which takes into account all the limits above and
changes over time, stands at 67.9 percent of GDP in 2021 and 67.7 percent of GDP 2022, and
baseline debt is projected to remain below those limits in both years. With the authorities
confirming that the 65 percent of GDP ceiling will remain effective until 2025, baseline debt
remains below the effective limit until then.
5. Realism of Baseline Assumptions.
• Past assumptions on real growth and primary balance are neither too optimistic nor pessimistic.
The highest median forecast error for the GDP deflator is -1.8 percent, suggesting that the staff
forecasts have been relatively optimistic. The forecast bias has improved in the past few years.
• Under the baseline scenario, the projected 3-year adjustment in the cyclically adjusted primary
balance (CAPB) is relatively small, with a percentile rank of 27 percent compared to the historical
experience for high-debt market access countries. The CAPB level is in a percent rank of
77 percent.

MALAYSIA
6. Stress Tests and Risks. Under the baseline scenario, the federal government debt will
remain within the authorities’ new debt anchor until 2025 and under the DSA’s debt burden
benchmark of 70 percent in the medium term.
• Macro-fiscal stress tests. Debt is expected to remain below the 70 precent benchmark in the
medium-term under the real interest rate shock and the primary balance shocks. The debt profile
improves under a real depreciation shock given the low share of foreign-denominated debt
instruments. The real growth shock and combined shocks however would cause debt to increase
over 70 percent of GDP in the medium term. Gross financing needs remain below the DSA’s
15 percent benchmark under all shock scenarios.
• Contingent liability shock. This shock assumes that the government is obliged to absorb all
committed guarantees, totaling 13 percent of GDP, over 5 years. This shock also assumes
negative feedback effect on interest rate. The debt-to-GDP ratio would rise to 77.2 percent of
GDP in the medium term, breaching the DSA and debit limit benchmarks.
7. Illustrative fiscal consolidation scenarios. The 2022 Budget confirmed the authorities’
3.5 percent of GDP deficit target for 2025 as per the 12MP. Reaching that target would require fiscal
consolidation measures of about 1.3 pp relative to the baseline, optimally starting once the recovery
is entrenched. The adjustment would optimally be more heavily based on revenue measures. The
consolidation is necessary to rebuild buffers and maintain the ability to respond to future shocks and
to finance the ambitious and necessary development expenditure agenda under the 12MP. It is also
needed to maintain market confidence and address Malaysia’s structural fiscal issues including (i)
persistent revenue weakness, (ii) increasing burden of debt servicing costs, (iii) and the uncertainty as
well as crowding-out costs of continuing to finance deficits through heavy reliance on the domestic
market. Finally, fiscal policy has a key role to play in climate change mitigation, which is an urgent
priority for the authorities, and carbon pricing initiatives have proven their ability to achieve climate
mitigation goals with the added benefit of significant revenue generation. Relatedly, staff analysis
also shows there is scope for climate mitigation and adaptation to be skillfully integrated, for
instance by hypothecating some share of revenues from a potential carbon tax for adaptation-
related public investment spending which would boost economic growth and thereby provide
additional fiscal space.

MALAYSIA
Figure 1. Malaysia: Public Sector Debt Sustainability Analysis – Baseline Scenario

(Percent of GDP unless otherwise indicated)
Debt, Economic and Market Indicators 1/
Actual Projections As of September 15, 2021
2/
2010-2018 2019 2020 2021 2022 2023 2024 2025 2026 Sovereign Spreads
Nominal gross public debt 51.1 52.4 62.1 63.4 65.0 64.3 64.3 64.2 63.9 EMBIG (bp) 3/ 194
Public gross financing needs 8.8 4.1 9.6 11.3 10.9 8.3 8.8 8.2 8.1 5Y CDS (bp) 43
Real GDP growth (in percent) 5.5 4.4 -5.6 3.1 5.7 5.7 5.0 4.5 4.5 Ratings Foreign Local
Inflation (GDP deflator, in percent) 2.1 0.1 -0.8 5.7 1.7 3.0 2.3 2.7 2.8 Moody's A3 A3
Nominal GDP growth (in percent) 7.7 4.5 -6.4 9.0 7.5 8.9 7.4 7.3 7.4 S&Ps A- A
Effective interest rate (in percent) 4/ 4.3 4.4 4.3 4.4 4.7 4.9 5.2 5.4 5.6 Fitch BBB+ BBB+
Contribution to Changes in Public Debt

Actual Projections
2010-2018 2019 2020 2021 2022 2023 2024 2025 2026 cumulative debt-stabilizing
Change in gross public sector debt 0.3 1.2 9.7 1.3 1.6 -0.7 0.0 -0.1 -0.3 1.8 primary
Identified debt-creating flows 0.2 -1.3 9.8 1.3 1.6 -0.7 0.0 -0.1 -0.3 1.8 balance 9/
Primary deficit 1.8 -1.2 3.8 3.9 3.3 1.7 1.3 1.0 0.8 12.0 -1.1
Primary (noninterest) revenue and grants 18.7 17.5 15.9 14.3 14.1 13.6 13.6 13.5 13.5 82.7
Primary (noninterest) expenditure 20.5 16.3 19.7 18.2 17.4 15.3 14.9 14.6 14.3 94.7
Automatic debt dynamics 5/ -1.5 0.0 6.0 -2.6 -1.6 -2.4 -1.3 -1.2 -1.1 -10.2
Interest rate/growth differential 6/ -1.6 0.0 6.0 -2.6 -1.6 -2.4 -1.3 -1.2 -1.1 -10.2
Of which: real interest rate 1.0 2.1 2.8 -0.8 1.7 1.0 1.7 1.5 1.6 6.7
Of which: real GDP growth -2.6 -2.2 3.2 -1.8 -3.4 -3.4 -3.0 -2.7 -2.7 -16.9
Exchange rate depreciation 7/ 0.0 0.0 0.0 … … … … … … …
Other identified debt-creating flows 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Contingent liabilities 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Residual, including asset changes 8/ 0.1 2.5 -0.1 0.1 -0.1 0.0 0.0 0.0 0.0 0.0
12 25
Debt-Creating Flows projection
10 20
(in percent of GDP)
8 15
6 10
4 5
2 0
0 -5
-2 -10
-4 -15
-6 -20
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 cumulative
Primary deficit Real GDP growth Real interest rate Exchange rate depreciation
Other debt-creating flows Residual Change in gross public sector debt
Source: IMF staff.

1/ Public sector is defined as central government.
2/ Based on available data.
3/ Long-term bond spread over U.S. bonds.
4/ Defined as interest payments divided by debt stock (excluding guarantees) at the end of previous year.
5/ Derived as [(r - π(1+g) - g + ae(1+r)]/(1+g+π+gπ)) times previous period debt ratio, with r = interest rate; π = growth rate of GDP deflator; g = real GDP growth rate;
a = share of foreign-currency denominated debt; and e = nominal exchange rate depreciation (measured by increase in local currency value of U.S. dollar).
6/ The real interest rate contribution is derived from the numerator in footnote 5 as r - π (1+g) and the real growth contribution as -g.
7/ The exchange rate contribution is derived from the numerator in footnote 5 as ae(1+r).
8/ Includes asset changes and interest revenues (if any). For projections, includes exchange rate changes during the projection period.
9/ Assumes that key variables (real GDP growth, real interest rate, and other identified debt-creating flows) remain at the level of the last projection year.

MALAYSIA
Figure 2. Malaysia: Public Debt Sustainability Analysis – Composition of Public Debt and
Alternative Scenarios
Composition of Public Debt
By Maturity By Currency
(in percent of GDP) (in percent of GDP)
70 70
Medium and long-term Local currency-denominated
60 Short-term 60 Foreign currency-denominated
50 50
40 40
30 30
projection
20 projection 20
10 10
0 0
2010 2012 2014 2016 2018 2020 2022 2024 2026 2010 2012 2014 2016 2018 2020 2022 2024 2026
Alternative Scenarios
Baseline Historical Constant Primary Balance
Gross Nominal Public Debt Public Gross Financing Needs

(in percent of GDP) (in percent of GDP)
80 14
70 12
60
10
50
8
40
6
30
4
20
10 2
projection projection
0 0
2019 2020 2021 2022 2023 2024 2025 2026 2019 2020 2021 2022 2023 2024 2025 2026
Underlying Assumptions
(in percent)
Baseline Scenario 2021 2022 2023 2024 2025 2026 Historical Scenario 2021 2022 2023 2024 2025 2026
Real GDP growth 3.1 5.7 5.7 5.0 4.5 4.5 Real GDP growth 3.1 4.0 4.0 4.0 4.0 4.0
Inflation 5.7 1.7 3.0 2.3 2.7 2.8 Inflation 5.7 1.7 3.0 2.3 2.7 2.8
Primary Balance -3.9 -3.3 -1.7 -1.3 -1.0 -0.8 Primary Balance -3.9 -1.5 -1.5 -1.5 -1.5 -1.5
Effective interest rate 4.4 4.7 4.9 5.2 5.4 5.6 Effective interest rate 4.4 4.7 5.0 5.4 5.7 6.0
Constant Primary Balance Scenario
Real GDP growth 3.1 5.7 5.7 5.0 4.5 4.5
Inflation 5.7 1.7 3.0 2.3 2.7 2.8
Primary Balance -3.9 -3.9 -3.9 -3.9 -3.9 -3.9
Effective interest rate 4.4 4.7 4.9 5.2 5.5 5.7
Source: IMF staff.

MALAYSIA
Figure 3. Malaysia: Public Debt Sustainability Analysis – Realism of Baseline Assumptions

Forecast Track Record, versus all countries
Real GDP Growth Primary Balance Inflation (Deflator)
(in percent, actual-projection) (in percent of GDP, actual-projection) (in percent, actual-projection)
Malaysia median forecast error, 2010-2018: 0.04 Malaysia median forecast error, 2010-2018: -0.01 Malaysia median forecast error, 2010-2018: -1.78
Has a percentile rank of: 63% Has a percentile rank of: 53% Has a percentile rank of: 4%
7 3 6
6
pessimistic
5 2 4
4
3 1 2
2
0 0
1
Distribution of forecast Distribution of forecast Distribution of forecast
0
optimistic
errors: 1/ -1 errors: 1/ -2 errors: 1/

-1
Distribution of forecast errors: Distribution of forecast errors: Distribution of forecast errors:
-2 -2 -4
Median Median Median
-3
Malaysia forecast error Malaysia forecast error Malaysia forecast error
-4 -3 -6
2010 2011 2012 2013 2014 2015 2016 2017 2018 2010 2011 2012 2013 2014 2015 2016 2017 2018 2010 2011 2012 2013 2014 2015 2016 2017 2018
Year 2/ Year 2/ Year 2/
Assessing the Realism of Projected Fiscal Adjustment Boom-Bust Analysis 3/

3-Year Adjustment in Cyclically-Adjusted 3-Year Average Level of Cyclically-Adjusted Primary Real GDP growth
Primary Balance (CAPB) Balance (CAPB) (in percent)
(Percent of GDP) (Percent of GDP) Malaysia
14 12 8
Distribution 4/ 3-year CAPB adjustment Distribution 4/ 3-year average CAPB level
12 Malaysia greater than 3 percent of GDP Malaysia greater than 3.5 percent of 6
10
has a percentile in approx. top quartile has a percentile GDP in approx. top quartile
10 rank of 27% rank of 75% 4
8
8 2 Not applicable for Malaysia
6
6 0
4
4 -2
2 2
-4
0 0
-6
More
More
Less
-4
-3
-2
-1
0
1
2
3
4
5
6
7
8
Less
-4
-3
-2
-1
0
1
2
3
4
5
6
7
8
t-5 t-4 t-3 t-2 t-1 t t+1 t+2 t+3 t+4 t+5
Source : IMF Staff.

1/ Plotted distribution includes all countries, percentile rank refers to all countries.
2/ Projections made in the spring WEO vintage of the preceding year.
3/ Not applicable for Malaysia, as it meets neither the positive output gap criterion nor the private credit growth criterion.
4/ Data cover annual obervations from 1990 to 2011 for advanced and emerging economies with debt greater than 60 percent of GDP. Percent of sample on vertical axis.

MALAYSIA
Figure 4. Malaysia: Public Debt Sustainability Analysis – Stress Tests

Macro-Fiscal Stress Tests
Baseline Primary Balance Shock Real Interest Rate Shock

Real GDP Growth Shock Real Exchange Rate Shock
Gross Nominal Public Debt Gross Nominal Public Debt Public Gross Financing Needs
(in percent of GDP) (in percent of Revenue) (in percent of GDP)
80 600 14
75 500 12
10
70 400
8
65 300
6
60 200
4
55 100 2
50 0 0
2021 2022 2023 2024 2025 2026 2021 2022 2023 2024 2025 2026 2021 2022 2023 2024 2025 2026
Additional Stress Tests

Baseline Combined Macro-Fiscal Shock
Contingent liability Fiscal Consolidation Scenario
Gross Nominal Public Debt Gross Nominal Public Debt Public Gross Financing Needs
(in percent of GDP) (in percent of Revenue) (in percent of GDP)
80 600 16
75 550 14
70 500 12
65 450 10
60 400 8
55 350 6
50 300 4
45 250 2
40 200 0
2021 2022 2023 2024 2025 2026 2021 2022 2023 2024 2025 2026 2021 2022 2023 2024 2025 2026
Underlying Assumptions
(in percent)
Primary Balance Shock 2021 2022 2023 2024 2025 2026 Real GDP Growth Shock 2021 2022 2023 2024 2025 2026
Primary balance -3.9 -3.6 -2.5 -1.5 -1.2 -0.9 Primary balance -3.9 -4.0 -3.0 -1.3 -1.0 -0.8
Real Interest Rate Shock Real Exchange Rate Shock
Primary balance -3.9 -3.3 -1.7 -1.3 -1.0 -0.8 Primary balance -3.9 -3.3 -1.7 -1.3 -1.0 -0.8
Combined Shock
Real GDP growth 3.1 2.3 2.3 5.0 4.5 4.5
Inflation 5.7 0.8 2.2 2.3 2.7 2.8
Primary balance -3.9 -4.0 -3.0 -1.5 -1.2 -0.9
Effective interest rate 4.4 4.8 5.5 6.2 6.8 7.3
Source: IMF staff.

MALAYSIA
Figure 5. Malaysia: Public Debt Sustainability Analysis Risk Assessment

Heat Map
Debt level
1/ Real GDP Primary Real Interest Exchange Rate Contingent
Growth Shock Balance Shock Rate Shock Shock Liability shock
2/ Real GDP Primary Real Interest Exchange Rate Contingent

Gross financing needs
Growth Shock Balance Shock Rate Shock Shock Liability Shock
External Change in the Public Debt Foreign

Market
Debt profile 3/ Financing Share of Short- Held by Non- Currency
Perception
Requirements Term Debt Residents Debt
Evolution of Predictive Densities of Gross Nominal Public Debt

(in percent of GDP)
Baseline Percentiles: 10th-25th 25th-75th 75th-90th
Symmetric Distribution Restricted (Asymmetric) Distribution

80 90
70 80
70
60
60
50
50
40
40
30
30 Restrictions on upside shocks:
20 20
no restriction on the growth rate shock
no restriction on the interest rate shock
10 10 0 is the max positive pb shock (percent GDP)
no restriction on the exchange rate shock
0 0
2019 2020 2021 2022 2023 2024 2025 2026 2019 2020 2021 2022 2023 2024 2025 2026
Debt Profile Vulnerabilities

(Indicators vis-à-vis risk assessment benchmarks, in 2020)
Malaysia Lower early warning Upper early warning
31%
1.2%
600 15 1 45 60
26%
182
bp
200 5 0.5 15 20
3%
1 2 1 2
Annual
1
Change2
in 1 2 1 2
External Financing Public Debt Held by Public Debt in

Bond spread Short-Term Public
Requirement Non-Residents Foreign Currency
Debt
(in basis points) 4/ (in percent of GDP) 5/ (in percent of total) (in percent of total) (in percent of total)
Source: IMF staff.

1/ The cell is highlighted in green if debt burden benchmark of 70% is not exceeded under the specific shock or baseline, yellow if exceeded under specific shock but not
baseline, red if benchmark is exceeded under baseline, white if stress test is not relevant.
2/ The cell is highlighted in green if gross financing needs benchmark of 15% is not exceeded under the specific shock or baseline, yellow if exceeded under specific shock but
not baseline, red if benchmark is exceeded under baseline, white if stress test is not relevant.
3/ The cell is highlighted in green if country value is less than the lower risk-assessment benchmark, red if country value exceeds the upper risk-assessment benchmark, yellow
if country value is between the lower and upper risk-assessment benchmarks. If data are unavailable or indicator is not relevant, cell is white.
Lower and upper risk-assessment benchmarks are:
200 and 600 basis points for bond spreads; 5 and 15 percent of GDP for external financing requirement; 0.5 and 1 percent for change in the share of short-term debt; 15 and
45 percent for the public debt held by non-residents; and 20 and 60 percent for the share of foreign-currency denominated debt.
4/ Long-term bond spread over U.S. bonds, an average over the last 3 months, 17-Jun-21 through 15-Sep-21.
5/ External financing requirement is defined as the sum of current account deficit, amortization of medium and long-term total external debt, and short-term total external debt
at the end of previous period.

MALAYSIA
Appendix III. External Sector Assessment1

Overall Assessment: On a preliminary basis and adjusting for transitory factors, Malaysia’s external position in 2021 is assessed as moderately
stronger than the level implied by medium-term fundamentals and desirable policies. During the COVID-19 pandemic, Malaysia’s CA surplus
increased given strong external demand for pandemic related exports, including personal protective equipment (PPE) and electronic and electrical
(E&E) equipment. A decline in the surplus is projected over the medium-term as domestic private demand gradually recovers and as Malaysia
moves from the pandemic to the endemic phase of COVID-192.
Potential Policy Responses: With Malaysia almost fully vaccinated, near-term policies should continue to support the nascent recovery through
a targeted fiscal expansion combined with an accommodative monetary policy stance. Over the medium term, fiscal policy should target a
gradual and growth-friendly consolidation, while policies that strengthen social safety nets and encourage private investment and productivity
growth should be prioritized to support external rebalancing and help to bring the current account balance closer to its norm.
Foreign Asset Background. Malaysia’s NIIP has averaged around 1 percent since 2010 and was 5.9 percent of GDP in 2021 (compared
and Liability with 4.8 percent of GDP at the end of 2020), reflecting higher gross and reserve assets, and an increase in net portfolio
Position and investment. Direct investment and portfolio investment abroad contribute most to assets, whereas direct investment and
Trajectory portfolio liabilities contribute most to liabilities. Total external debt, measured in US dollars, was about 68 percent of GDP
in 2021 (compared with 71 percent at the end of 2020), has remained manageable, with one third of it is in foreign currency,
and 37 percent in short-term debt by original maturity (half of which held by intragroup borrowings among banks and
corporations which have been generally stable during the pandemic).
Assessment. Malaysia’s NIIP is projected to rise over the medium term, reflecting projected CA surpluses. Malaysia’s
balance sheet strength, exchange rate flexibility, and increased domestic investor participation should continue to help
withstand shocks (as they have in the context of the COVID-19 crisis).
2021 (percent GDP) NIIP: 5.9 Gross Assets: 137.1 Res. Assets: 31.5 Gross Liab.: 131.2 Debt Liab.: 29.7
Current Background. Between 2010 and 2019 Malaysia’s CA surplus contracted by 7 percentage points, underpinned by lower
Account national savings and robust domestic demand. In 2021 the CA account surplus narrowed slightly to 3.5 percent of GDP
(compared to 4.2 percent of GDP in 2020) as a recovery in overall imports has partly offset exports. The CA surplus
continues to be affected by pandemic-related transitory factors including (1) the decline in travel income given continued
international travel restrictions; (2) the sustained strong external demand for pandemic-related exports, including rubber
glove products and electronic and electrical equipment; and (3) the decline in outward remittances from the crisis and
lockdown measures in 2021.
Assessment. The EBA CA model estimates a cyclically adjusted CA of 1.7 percent of GDP and a CA norm at −0.1 percent of
GDP for 2021. After factoring in the transitory effect on the CA of the net exports of pandemic-related medical goods,
including rubber glove products (1.3 percent of GDP), the global household consumption composition shift (0.9 percent of
GDP), lower net remittances (0.2 percent of GDP), the decline in receipts from travel services receipts including tourism
(−1.5 percent), and transport (-0.12) the estimate of the IMF staff CA gap is about 1.1 percent of GDP (±1 percent of GDP).
Relative policy gaps largely explain the CA gap: low public health care expenditure compared to the rest of the world
contributes 0.9 percentage point to the CA gap, while the looser fiscal policies adopted in 2021 in the rest of the world
relative to Malaysia also contribute 0.9 percentage points to the excess surplus.
2021 (percent GDP) CA: 3.5 Cycl. Adj. CA: 1.7 EBA Norm: −0.1 EBA Gap: 1.8 COVID-19 Adj.: −0.7 Other Adj. Staff Gap: 1.1
Real Exchange Background. In 2021 the REER depreciated by 0.5 percent relative to the 2020 average and is about 6 percent lower than
Rate in 2015. The mild depreciation in 2021 compared to 2020 (-3 percent) reflect a stabilization in capital outflows and the effect
of the weakened economic outlook and new COVID-19 waves on the NEER.
Assessment. The IMF staff CA gap implies a REER undervaluation of −2.4 percent in 2021, applying an estimated elasticity
of 0.46. The EBA REER index and level models estimate Malaysia’s REER to be undervalued by −30 percent and −41 percent,
respectively. At the same time, considering the lack of underlying macroeconomic stresses, such as inflation or wage
pressures, and the broad stability of FX reserves, the IMF staff assesses the REER to be undervalued in the range of −0.4 to
−4.4 percent, with a midpoint of −2.4 percent, consistent with the IMF staff CA gap.
1
Prepared by Nour Tawk.
2
The assessment is preliminary given the lack of full-year data for 2021. A complete analysis will be provided in the
2022 External Sector Report.

MALAYSIA
Capital and Background. Since the global financial crisis, Malaysia has experienced periods of significant capital flow volatility,
Financial largely driven by portfolio flows in and out of the local-currency debt market, in response to both the change in global
Accounts: Flows financial conditions and domestic factors. In 2020 Malaysia saw capital outflows during the March 2020 global risk-off
and Policy episode, but capital flows stabilized afterward. Capital flows have remained broadly stable in 2021 despite the
Measures resurgence of COVID-19 waves and the renewal of lockdowns. Net portfolio flows reached US$5.9 billion by
September 2021, primarily driven by sustained net debt inflows (US$6.8 billion. Since late 2016 the Financial Markets
Committee has implemented measures to develop the onshore FX market and increase hedging opportunities.3
Assessment. Continued exchange rate flexibility and macroeconomic policy adjustments, such as those prescribed by
the IPF, are necessary to manage capital flow volatility. CFMs should be gradually phased out, with due regard for
market conditions.
FX Intervention Background. Reserve levels have steadily increased for Malaysia during the COVID-19 pandemic, after capital outflows
and Reserves to the region stabilized following the risk-off episode in March 2020. Reserve levels stood at US$116.9 billion as of
Level December 2021 (compared to US$107.6 billion at the end of December 2020).
Assessment. Under the IMF’s composite ARA metric, reserves remain broadly adequate therefore further accumulation
is uncalled for. Gross official reserves were about 126 percent of the ARA metric at the end of December 2021. FX
interventions should continue to be limited to preventing disorderly market conditions (DMC), while the exchange rate
should continue to adjust as a first line of defense and to serve as a shock absorber in case of DMCs.
3
On December 2, 2016, the Financial Markets Committee announced a package of measures aimed at facilitating onshore FX
risk management and enhancing the depth and liquidity of onshore financial markets. Two of these measures were classified
as CFMs under the IMF’s institutional view on capital flows. In addition, the authorities’ strengthened enforcement of
regulations on resident banks’ noninvolvement in offshore ringgit transactions was considered enhanced enforcement of an
existing CFM measure. Over the course of 2017–19, additional measures were announced to help deepen the onshore
financial market and facilitate currency risk management

MALAYSIA
Appendix IV. Trade Liberalization and GVCs as Engines of Growth

in Malaysia1
The pandemic has resulted in unprecedented output losses in Malaysia, and as everywhere, it is expected
to engender significant medium-term scarring. An urgent and renewed structural reform drive is
therefore needed to boost productivity and output potential. Trade has been a powerful driver of growth
and poverty alleviation in Malaysia, but trade restrictions – especially non-tariff barriers - have remained
high and have changed little since the 1990s. The analysis in this appendix indicates that while the
pandemic would adversely impact trade and GVC patterns in the medium term, a reduction in non-tariff
barriers could boost growth, productivity, and investment, mitigating some of the pandemic-related
losses.
A. The Pre-Pandemic Landscape

1. Trade has been a powerful driver of growth for Malaysia historically, as in the Asia-
Pacific region. The benefits of international trade are many and well documented in the literature,
but among others, trade can help boost investment and productivity by allowing for faster spread of
technology, including through linkages formed when participating in global value chains (see, for
example, Krugman, 1979; Grossman and Helpman, 1991; Young, 1991; and Frankel and Romer, 1999
among others).
2. In Malaysia, trade witnessed decades of robust growth. De facto trade openness (defined
as a share of goods and services trade in GDP) in Malaysia reached over 200 percent of GDP in the
years leading to the Global Financial Crisis (GFC), but then began to decline afterwards, in line with
ASEAN peers (figure 1, panel 1). A similar trend is visible with respect to Global Value Chain (GVC)
integration, despite Malaysia having a seminal role in integration and global manufacturing.
Backward linkages (foreign value-added goods and refer to the use of imported value-added goods
as inputs in the production of exports) are the second highest (following Singapore) in ASEAN
countries, and have stalled in the past decade, despite an increasing trend prior to the GFC (figure 1,
panel 2).
3. A slowdown in trade liberalization is among the many reasons for the slowdown in
trade momentum prior to the pandemic in Malaysia and other countries. The slowdown in
global economic activity following the GVC, and subsequently investment, largely accounts for the
slowdown in trade growth (World Economic Outlook 2016, Chapter 2). But another explanation can
be tied to the stagnation in trade liberalization and the slower pace of trade reforms (Asia and Pacific
Regional Economic Outlook 2021, Chapter 4). Indeed, the fast decline in tariffs from more than
50 percent in the 1970s to less than 6 percent in the 2000s contributed to the fast export growth in
the region (figure 1, panel 3). By 2014, tariffs in Malaysia were already lower than average tariffs in
Asia (1.2 percent). This indicates that little scope for further tariff reductions. However, this is not the
case for non-tariff barriers.
1
Prepared by Nour Tawk. This appendix leverages the work on trade liberalization contained in the October 2021 Asia
and Pacific Regional Economic Outlook.

MALAYSIA
4. Non-tariff barriers remain high in Malaysia and the ASEAN region more generally but
are more difficult to quantify given data constraints. To remedy this, we use the novel and
comprehensive trade restrictions index (the NTB index, henceforth referred to as the NTBI), compiled
by Estefania Flores and others (2022), which covers up to 157 countries going back as far as 1949.
The NTBI is constructed based on detailed information on trade restrictions using data from the
IMF’s Annual Report on Exchange Arrangements and Exchange Restrictions (AREAER) and is an
empirical measure of how restrictive official government policy is against international flows of
goods and services. Namely, the index is constructed on the following AREAR measures: i) exchange
measures; ii) arrangements for payments and receipts; iii) imports and import payments; iv) exports
and exports proceeds; and v) payments and proceeds from invisible transfers and current transfers.
Therefore, the index combines information on relevant non-tariff barriers, including payment
restrictions, licensing requirements, documentation requirements, and so on. The index varies from 0
to 20, with lower levels indicating fewer trade restrictions.
5. Non-tariff barrier reforms have stalled in Malaysia and across ASEAN countries. The
NTBI has declined from 15 in 1949 to 11 in 2019 in line with ASEAN peers (with the exception of
Singapore), and rankly slightly below Asia’s median (figure 1, panel 4). However, while Malaysia has
lower NTBs on average compared to EMDEs in Asia, it has higher NTBs compared to other EMDEs
(text chart) suggesting scope for further liberalization. Indeed, compared to a standard European
EMDE (where NTBs are lowest), NTBs with regards to imports and exports remain, which could make
trade more costly. Those would include restrictions on imports and import payments such as
documentation requirements for release of foreign exchange for imports (such as pre-shipment
inspections, documents requirements), import
Non-Tariff Barriers Index in EMDEs
licenses (open general licenses and licenses with (2019, weighted average, 2019 GDP)
quotas requirements). Other non-tariff barriers

also remain on exports and exports proceeds:
those include repatriation requirements, surrender
requirements, documentation requirements (such
as pre-shipment inspections), and export licenses.
On the other hand, and comparable to advanced
economies and European EMDEs, Malaysia has
removed all restrictions to payments for invisible
transactions and current transfers.
B. The Effect of the COVID-19 Pandemic on Trade Patterns, and Risks of

Scarring
6. The impact of the COVID-19 pandemic on trade in Malaysia differs from past
recessions episodes. During the GFC, Malaysia’s exports of goods declined by 17 percent following
the global shock. However, services held up, as exports of services dropped by less than 5 percent on
average in 2009 and had recovered by the following year (Figure 2, panel 1). As for COVID-19, while
initially the Movement Containment Order (MCO) caused net exports to crash in 2020Q2, what
followed was an increase in exports in the following quarters so that exports of goods only declined

MALAYSIA
by 5 percent in 2020, causing a net increase in the trade balance by 11 percent in 2020. However, this
net increase in the goods balance was offset by the collapse in the services balance: exports of
services declined by 46 percent in 2020, while imports of services were reduced by 23 percent. Losses
in services were mainly driven by the collapse in international travel, which nearly quadrupled the
services balance deficit.
7. The pandemic has had a heterogeneous impact on trade across sectors. As a

manufacturer of pharmaceutical goods, protective and personal equipment (PPE), and electronic and
electrical (E&E) equipment, Malaysia was well positioned to benefit from the external demand for
pandemic-related goods (Figure 2, panel 2). Indeed, exports of both pharmaceuticals and PPE
increased by almost 8 percent year-on-year in 2020, with a pronounced increase in exports of PPE
rubber gloves. E&E exports followed by a 7 percent increase, as the work-from-home new norm
propelled household demand for electronic goods. This more than offset the temporary decline in
exports of autos and machinery, as well as of agriculture and mining exports which had been
generally robust in the years prior to the pandemic.
8. Anecdotal evidence on trade and GVCs suggest disruption in supply chains following
stringent lockdown episodes. In 2021Q2, a severe COVID-19 wave caused prompted authorities to
keep essential sectors operative at 60 percent capacity, while all non-essential sectors shut down.
However, as outbreaks occurred, manufacturing factories were shut down to control the spread of
the virus. This resulted in disruptions in the supply of semi-conductors which led to shutdowns of
many global manufacturers, including US (Ford Motors), Japanese (Toyota and Nissan), and German
(Infineon) manufacturers. News on supply disruptions persisted well after the lockdowns have been
lifted and as firms transition back to full capacity operations: data on port congestion suggests that
cargo rollovers2 in Malaysia’s Port Klang3 had increased by over 58 percent in 20214, among the
highest in the region5, leading to higher container median time in port compared to historical norms
(figure 2, panel 3).
9. High frequency proxies on GVCs corroborate anecdotal evidence on supply chain

disruptions. We use monthly data on the share of intermediate imports to total imports as a proxy
for GVC participation and find that fluctuations in intermediate imports correspond to periods of
lockdowns in Malaysia. Monthly data on semi-conductor exports shows a similar trend, with troughs
and peaks corresponding to periods of lockdowns and of restrictions eased respectively (figure 2,
panel 4).
2
A container rollover is when a container fails to get loaded onto its scheduled vessel and has to be accommodated
on a subsequent ship.
3
Port Klang is considered among the biggest 50 container ports in the world (https://www.worldshipping.org/top-50-
ports)
4
https://www.theedgemarkets.com/article/port-klang-has-highest-container-rollover-percentage-5845-2021-
percentE2percent80percent94-data.
5
Recent news point to an easing in global supply chains disruptions.

MALAYSIA
10. We assess the pandemic’s medium-term impact on GVCs and trade patterns by looking
at past recessions and pandemic episodes. Local projection methods using data on measures of
GVC participation at the country-year level for ASEAN countries are regressed on indicators for past
recessions and pandemics. The results indicate that recessions and pandemics have a large and
persistent impact on GVCs: in the medium term, backward linkages, forward linkages, and total GVC
linkages decline by -2.3, -0.2, and -2.1 percentage points respectively (figure 2, panel 5). The results
also show the importance of country linkages, highlighting that when recessions occur in partner
countries, they also lead to a decline GVCs. The results suggest that, in the medium term, a
6 percentage points decline in country partner growth would lead to a -0.9 percentage points
decline in total GVCs, and by -0.5 and -0.4 percentage points for backward and forward linkages
respectively (figure 2, panel 6). This implies scarring effects from the pandemic on trade and GVC
patterns, requiring structural reforms to remedy potential losses in the medium term.
C. Potential Growth Gains from Further Trade Liberalization
11. Empirical analysis on the effects of a reduction in NTBs suggest positive outcomes on
economic variables. Based on a sample of 34 countries in Asia, regressions are estimated at the
country-year level on the effects of a change in the NTBI on economic growth, productivity,
investment, and trade in goods and services, while controlling for country and time fixed effects. The
results suggest that NTBI reforms are historically associated with boosting economic activity: a one
standard deviation decrease in the NTBI leads to a 0.5 percentage point increase in GDP. In addition,
this reduction in non-tariff barriers boosts productivity by 0.7 percentage points, and investment by
1.8 percentage points (figure 3, panel 1).
12. Trade also benefits from a reduction in NTBs, helping mitigate some of the pandemic’s
scarring effects. While the results of the effects of NTBIs on trade in goods are not statistically
significant in the Asia sample (but are significant in a global sample), they indicate that NTBI reforms
can lead to significant increases in trade in services in the medium term. This is of particular
relevance for countries like Malaysia, where services trade has been adversely impacted by the
COVID-19 pandemic (figure 3, panel 1), most notably tourism flows which continue to remain
depressed.
13. Gains from NTBI reforms can vary significantly, depending on country characteristics.
Emerging market and developing economies seemingly receive larger benefits from reducing NTBs,
as this could reflect potential gains from technology transfers. Gains are smaller for advanced
economies, who are generally further on the technology frontier. The empirical results also show that
effects of NTB reductions on GDP are especially more pronounced in countries that are more
integrated in value chains. This suggests that Malaysia could be well positioned to achieve large
gains from NTB reductions, given that it is GVC-intensive, and that NTBs remain somewhat high.
Finally, gains from NTB reforms appear larger in countries which rank higher on the structural reform
index (signaling more liberalized domestic and labor markets for instance). This suggests that other
structural reforms could also enhance the effects of reducing NTBs, therefore amplifying the effects
of trade liberalization (figure 3, panel 2).

MALAYSIA
14. Trade reforms can reverse some of the output losses from the COVID-19 pandemic in
Malaysia. Our analytical results indicate that the pandemic could engender medium-term losses in
Malaysia, as in expected in the rest of the world as well. However, a push for trade liberalization,
namely in the form of a reduction in non-tariff barriers, could counter some of these scarring effects,
boosting growth, productivity, and investment. Malaysia is well positioned to receive some of these
benefits, especially given its importance in global value chains. The effect of trade liberalization on
growth is further enhanced when coupled with other structural reforms, highlighting the importance
of a comprehensive reform agenda.
Figure 1. Trade in Malaysia Before COVID-19

Before the pandemic, trade openness in Malaysia had …alongside GVC participation for Malaysia and the
been on a declining trend… region…
…despite having achieved low tariff levels … …but non-tariff barriers remain high…
Source: Estefania Flores et al. (2022)

MALAYSIA
Figure 2. Impact of the COVID-19 Pandemic and Past Recessions

Trade in goods remained resilient during COVID-19 External demand for pharmaceuticals, PPE and electrical
compared to the GFC, while services exports suffer… equipment supported Malaysian exports…
Anecdotal evidence suggests supply chain disruptions… …which are corroborated by high-frequency data on
intermediate imports and exports…
Malaysia: Containership Turnaround Times
(days per vessel; minutes per container)
1 0.40
Median time in port (lhs, days)
0.95 Median time in port per container (rhs, minutes)

0.37
0.9
0.34
0.85
0.31
0.8
0.28
0.75
0.7 0.25
2018H1 2018H2 2019H1 2019H2 2020H1 2020H2 2021H1
Sources: UNCTAD, MarineTraffic.
Recessions have a large and persistent impact on GVCs… …as do recessions and slowdowns in partner countries.

MALAYSIA
Figure 3. Impact of Reduction in NTBs

A reduction in NTBs could engender positive economic …while gains are higher depending on country
outcomes… characteristics.
Effect of Reducing NTBs on GDP
(percent)
0.90
0.60
0.30
0.00
-0.30
AEs EMDEs Low High Low High
Income GVC Structural Reform Index

Source: IMF staff calculations, Estefania, Furceri, Hannan, Ostry and Rose (2022), World Bank, UNCTAD Eora and IMF
Staff calculations .
Note: Figure corresponds to the IRF to a one standard deviation increase in NTB at the fifth (medium term)
horizon.Structural Reform Index is an average between labor, financial and product market reforms index.
Heterogenous effects for Income and Tariffs are calculated using the interaction of the Income/Tariffs dummy above
and below median with the NTB index. For GVC and Structural Reforms Index, smooth transition function are used.
Light shaded bars indicate that results are not significant at 90% CI. Standard errors are calculated using Driscoll-Kraay.

MALAYSIA
References
Estefania Flores, Julia, Davide Furceri, Swarnali Hannan, Jonathan D. Ostry, and Andrew K Rose. 2022.
“A Contribution to the Measurement of Aggregate Trade Restrictions.” IMF Working Paper
WP/22/1.
Frankel, Jeffrey, and David Romer. 1999. “Does Trade Cause Growth?” American Economic Review 89
(3): 379–99.
Grossman, Gene, and Elhanan Helpman. 1991. “Innovation and Growth in the Global Economy”.
Cambridge, Massachusetts: MIT Press.
International Monetary Fund. 2016. “Subdued Demand: Symptoms and Remedies”, WEO World
Economic Outlook Chapter 2
International Monetary Fund. 2021. “Reigniting Asia’s Growth Engine through Trade Liberalization”,
APD Regional Economic Outlook Chapter 4.
Krugman, Paul. 1979. “A Model of Innovation, Technology Transfer, and the World Distribution of
Income.” Journal of Political Economy 87 (2): 253–66.
Young, Alwyn. 1991. “Learning by Doing and the Dynamic Effects of International Trade.” Quarterly
Journal of Economics 106 (2): 369–405.

MALAYSIA
Appendix V. Economic Scarring and Distributional

Consequences of the COVID-19 Pandemic in Malaysia1
The COVID-19 pandemic risks substantial medium-term scarring, through reduced investment, lower
productivity and erosion in human capital. Such mechanisms also risk increasing inequality, as the
pandemic impact falls disproportionately on low-skilled workers and vulnerable groups. This appendix
attempts to quantify the impact on potential output and inequality in Malaysia, and then explores the
structural features of the economy that may amplify these effects and the corresponding policies which
could mitigate them.
A. Background: Pre-COVID Context and Recent Trends
Output Growth
1. While many emerging and developing economies (EMDEs) faced the pandemic with
slowing growth and high debt, Malaysia entered 2020 after a decade of strong growth
(Figure 1). Annual real GDP growth averaged around five percent over the last decade, significantly
above the EMDE median, and substantial room remained for monetary stimulus using conventional
tools. The downturn in Malaysia in 2020, however, was particularly severe, with output contracting
more than in many comparable economies, as was also the case during the Global Financial Crisis
when GDP fell by proportionately more than at any time since the Asian Financial Crisis. Alongside a
range of COVID-19 control measures, Malaysian authorities responded with substantial interest rate
cuts and four fiscal support packages. While these relieved pressure on some of the most affected
sectors, they have increased the federal government’s deficit- and debt-to-GDP ratios to record
highs, narrowing the available fiscal space.
2. The recessions caused by COVID-19 in many EMs, including Malaysia, are likely to have
substantial and persistent impacts on potential output. As with previous recessions, the
downturn raises serious risks of hysteresis effects through prolonged unemployment, bankruptcy
and resource misallocation (Bernstein et al. 2019, Furceri et al. 2021c). Yet it has added specific extra
pressures, such as reduced human capital accumulation due to school closures, especially in regions
and communities with limited access to digital infrastructure. Addressing these issues while also
providing a credible strategy for fiscal consolidation will be a key challenge in the medium term. The
Twelfth Malaysia Plan presents a constructive five-year roadmap, aiming to evade the middle-income
trap and propel the economy to high-income status, invest in human capital, enhance the digital and
green economies, boost transport infrastructure and increase the contribution of SMEs to the
economy.
1
Prepared by Alexander Copestake and Kodjovi Eklou.

MALAYSIA
Figure 1. Emerging Economies—Initial Conditions and the Impact of COVID-19 Crisis

Real GDP Growth, 1980-2019 Emerging Market and Developing Economies:
(Five-year average, percent) Government
Emerging Marketsand Corporate
and Developing Debt, Government
Economies: 2007 andand
2019
6 (Percent
Corporateof GDP)
debt, 2007 and 2019
(Percent of GDP)
Real GDP Growth, 1980-2019
5 (Five-year average, percent) 80
4
60
3
40
2
20
0
1
2007 2019 2007 2019
0
1981-84 1985-89 1990-94 1995-99 2000-04 2005-09 2010-14 2015-19
Government debt Corporate debt
Source: World Bank, June 2020 Global Economic Prospects, Chapter 3, Box1.
Advanced Economies Emerging Markets Low-Income Developing Countries Note: Bars show unweighted averages. Whiskers show interquartile range. Based on data for up to 150 Emerging
Markets and Developing Economies.
Inequality
3. COVID-19 threatens the progress Malaysia has made in reducing inequality over the
last four decades. Inequality has been declining since the end of the 1970s, on the back of the
economic transformation spurred by the commodity price boom and affirmative action for
disadvantaged groups under the New Economic Policy. This economic transformation has enhanced
social mobility and improved living standards for a
sizeable portion of the population (Hill, 2020). The
reduction in inequality accelerated over 1976-1979,
before stalling during the 1990s and 2000s –
following the Asian financial crisis. While inequality
has continued to decline post-GFC, albeit at a
slower pace, since 2019 it has started to increase
again, and this continued into 2020. The crisis
induced by the COVID-19 pandemic threatens to
accelerate this trend and reverse the progress of the
last four decades.

MALAYSIA
4. Inequality remains elevated compared to Inequality 2019: Malaysia and Comparator Countries
(Gini coefficient, index 0-100)
some peer countries, even after accounting for
redistribution. Although pre-pandemic (2019)
market inequality, as captured by the Gini index
before taxes and transfers, was close to the average
of other Asians EMs, net inequality was among the
largest compared to peers. This suggests that
redistributive policies played only a small role
compared to peer countries, and especially so when
compared to AEs, whether by design or due to a
lack of efficacy. Market inequality, however, remains
lower in Malaysia than in AEs.
B. Estimates of Economic Scarring and Distributional Implications of the

Pandemic
This section investigates the impacts of past recessions and pandemics on medium-term output and
inequality. Past recessions in emerging markets are used to quantify likely scarring effects, then the
recent literature on pandemics and inequality is surveyed to assess the likely distributional implications
of the COVID-19 pandemic.
The Evidence on Pandemics, Recessions, and Economic Scarring2
5. Recessions can have persistent negative effects on potential output, particularly due to
declining labor productivity and reduced investment. This section uses the local projection
method (Jordá, 2005) to provide a reduced form estimate of the response of potential growth to
recessions over various horizons, by comparing the average post-recession path of potential growth
with its predicted counterfactual. The estimation equation is:
𝑝 ℎ−1 𝑝
𝑦𝑡+ℎ,𝑗 − 𝑦𝑡−1,𝑗 = 𝛽(ℎ) 𝐸𝑡,𝑗 + ∑ 𝛾𝑙(ℎ),𝑠 𝐸𝑡−𝑠,𝑗 + ∑ 𝛾𝑓(ℎ),𝑠 𝐸𝑡+ℎ−𝑠,𝑗 + ∑ 𝛿(ℎ),𝑠 ∆𝑦𝑡−𝑠,𝑗 + 𝑎(ℎ),𝑗 + 𝜏(ℎ),𝑡 + 𝑢(ℎ)𝑡,𝑗
𝑠=1 𝑠=1 𝑠=1
where (𝑦𝑡+ℎ,𝑗 − 𝑦𝑡−1,𝑗 ) represents cumulative growth in log points of potential GDP, at different
horizons (ℎ = 0, … ,7), 𝑎(ℎ),𝑗 and 𝜏(ℎ),𝑡 are country and time fixed effects respectively, and 𝑢(ℎ)𝑡,𝑗 is the
error term. The coefficient 𝛽 captures the dynamic multiplier effect (impulse response) of the
cumulative growth in log points of potential GDP with respect to the recession event dummy variable
𝐸. The number of lags for each variable is denoted by 𝑝. The specification controls for past changes
of dependent variable ∆𝑦, lagged event dates, and future values of the event dummy between times
𝑡 and 𝑡 + ℎ − 1 to correct for possible forward bias. These controls alleviate possible endogeneity or
reverse causality and contemporaneous interactions between dependent and independent variables.
2
This section draws from Appendix III in the Thailand 2021 Article IV by Ara Stepanyan.

MALAYSIA
6. This analysis uses data from 39 emerging markets over the period 1980-2019.3
Recessions are defined as years with negative GDP growth (Huidrom and others, 2016), while a
financial crisis is defined as in Laeven and Valencia (2018). Data for structural indicators are mostly
from the Economic Freedom of the World, WDI, and OECD. Fiscal indicators are mostly from FAD’s
Global Debt and Fiscal Monitor datasets. The multivariate filtering approach developed by Blagrave
and others (2015) is used to estimate potential output. In some specifications, additional country-
time interaction terms are included to investigate the role of different propagation channels, initial
conditions, structural factors, and policy responses.
7. Past recessions led to substantial medium-term scarring in EMs that were magnified in
the context of pandemics. Our estimate show that in the sample, potential output was more than
4 percent lower after recession compared to no recession scenarios (Figure 2). Further, when
recessions coincide with pandemics, as identified from the Emergency Disasters Database, these
losses are even larger, with a central estimate of 15 percent, though with a wide confidence interval.
While such effects seem large, they are in line with results elsewhere, including from advanced
economies (Bannister and others, 2020). Our results also show that scarring occurs mainly through
the labor productivity and investment channels. More specifically, after 5 years, labor productivity
was more than 5 percent lower while investment was more than 2 percent lower compared to a no
recession scenario.
8. Countries’ initial conditions, structural characteristics and policy response shape the
magnitude of scarring effect of recessions (Figure 3). Interacting the recession indicator with debt
variables reveals that countries with large debt (public, corporate, and household debt) experience a
disproportionately large scarring effect from recessions reflecting the role of low buffers when facing
a recession. Further, the policy response also matters and can dampen the scarring effect. For
instance, a one percent of GDP increase in public investment is associated with around 5 percentage
points higher potential output after five years, affirming the substantial role for counter-cyclical fiscal
policy. Finally, structural reform can also reduce the scarring effect from recessions, with a more
flexible labor market and business regulation, and a better insolvency framework and a smaller
shadow economy, all contributing to the mitigation of scarring effects.
The Evidence on Pandemics and Inequality
9. Pandemics can increase inequality by disproportionally affecting the poorest and most
vulnerable members of the population. Furceri et al. (2021a), investigate the impact of five
epidemics that appeared in recent decades, namely SARS 2003, H1N1 2009, MERS 2012, Ebola 2014,
and Zika 2016. They find that these events increased inequality, through output contractions and job
losses for low-educated workers which redistribute income toward the less vulnerable and richer
3
Specifically, we use data from Algeria, Angola, Argentina, Azerbaijan, Belarus, Brazil, Chile, China, Colombia, Croatia,
Dominican Republic, Ecuador, Egypt, Hungary, India, Indonesia, Iran, Kazakhstan, Kuwait, Libya, Malaysia, Mexico,
Morocco, Oman, Pakistan, Peru, Philippines, Poland, Qatar, Romania, Russia, Saudi Arabia, South Africa, Sri Lanka,
Thailand, Turkey, Ukraine, United Arab Emirates, Uruguay, and Venezuela.

MALAYSIA
Figure 2. Impact of Recessions on Output, Productivity and Investment in Emerging

Economies
Sources: Emergency Disasters Database, WDI, WEO, and IMF staff estimates.
parts of the population.4 Emmerling et al. (2021) find similar results based on the five 21st century
pandemic episodes, and project a persistent increase in income inequality, as measured by the Gini
index, up to 2025. On the current pandemic, Schmitt-Grohé et al. (2020) find that, in the early stages
of the spread of the SARS-CoV-2 virus in the United States, the relative impact of the virus was far
larger on poor communities than on affluent ones. In developing countries, using high frequency
phone surveys, Kugler et al. (2021) show that female, younger, less educated and urban workers were
initially more affected, as they were more exposed to work stoppage due to the COVID-19
4
Similarly, Galletta and Giommoni (2020) provide evidence for the effect of the 1918 influenza in Italy, showing that
municipalities most exposed to the disease have experienced a persistent increase in inequality as a consequence of
the reduction in the share of income generated by the poorer side of the population, while top earners do not seem
to be affected.

MALAYSIA
Figure 3. The Role of Initial Conditions and Structural Factors in Post-Recession Scarring
Sources: Emergency Disasters Database, WDI, WEO, and IMF staff estimates.

MALAYSIA
lockdowns. These findings suggest that COVID-19 could lead to a rise in inequality. Indeed, the
evidence suggests that channels through which the pandemic can amplify existing inequalities (as
identified in Dosi et al., 2020), including inequities in risk of contagion, access to hospitalization,
ability to work remotely, and risk of longer-term job loss, have been operative.
10. Initial conditions and policy support shape the impact of pandemics on inequality.
Furceri et al. (2021b) show that the rise in inequality in the aftermath of major pandemics over the
last two decades has been higher in episodes with a lack of fiscal support. The increase in inequality
is particularly large in cases with lower fiscal deficits, lower public health expenditures, and lower
redistribution, in contrast to cases with no turn to austerity. These findings suggest that fiscal
support, in terms of public health spending, redistribution, and social protection spending, could
mitigate the distributional consequences of the current COVID-19 pandemic. 5 In addition to
providing evidence for the mitigating role of fiscal support, Aguirre and Hannan (2021) find that
countries with strong initial conditions, defined as low informality, high family benefit and high
health expenditure per capita, experience lower pandemic-induced inequality.
C. Implications for Malaysia
The Scarring Implications of the Pandemic for Malaysia
11. Medium-term output losses from the

pandemic are projected to be substantial.
While 2024 global output is projected to be
three percent below the pre-COVID forecast, this
impact is particularly large in emerging markets and
in Asia. The relatively large projected impact for
Malaysia – that is consistent with the previously
estimated impact in EMs – is driven by the initial
COVID shock plus further downgrades due to the
delta and omicron variants, both directly and
through external demand. Recent rapid progress in
the national vaccination campaign may thus ameliorate this projection, but there remain substantial
downside risks, including from potential vaccine-resistant new variants.
12. Malaysia’s high level of debt pre-COVID may amplify the scarring effects of the crisis.
Using our point estimates from section B where interaction effects are included, we plot in Figure 4
the Malaysia-specific impact and compare it to the median EM in the sample. Our results show that
scarring effects from past recessions in Malaysia were larger than in the median EM in the sample,
owing to the relatively large debt accumulation pre-crisis. Relatively large public and private debt
(both household and corporate debt accumulations have historically amplified the scarring effect of
5
See also, for instance, Almeida et al. (2021) showing a similar result for EU households.

MALAYSIA
recessions in Malaysia compared to the Public Consumption Accumulation Pre-Crisis and Scarring Effects
of Recessions
median EM in the sample (left-hand panels (Marginal impact on potential output)
Figure 4). Further, the impact of pre-crisis

6
public debt accumulation on potential output

in Malaysia was mostly driven by a larger
public consumption accumulation than peers.7
Recent evidence (Garrido et al., 2020) shows
that household debt tends to induce larger
drag on future GDP growth than corporate
debt, because of the high propensity to
consume among debtors – which leads to
vulnerabilities from household debt to build up faster if expenditure outpaces disposable income
(Garber et al, 2019, Mian and Sufi, 2018). Given that Malaysia entered the pandemic with relatively
higher debt compared to emerging market peers (right-hand panels of Figure 4) historical evidence
suggests that scarring concerns remain relevant. However, there are also mitigating factors for
Malaysia such as a relatively flexible business and labor market regulations. Beyond that, the overall
evidence here also reinforces the need for a credible and growth-friendly medium-term fiscal
consolidation strategy that would put debt on a downward trend and rebuild fiscal buffers
(Appendix VII). Proactive policies to skillfully address the household debt overhang will also be
essential.
13. The pandemic and related lockdown measures have substantial direct and spillover
effects across sectors through supply chains. Sectors which are not directly affected by pandemic-
related restrictions, for instance because they can be performed remotely, are impacted through
spillovers from their suppliers or their customers. Consider the input-output network in Figure 5,
which shades industries according to the share of employment that is teleworkable, esssential or
social, from Shibata (2020). Specifically, aggregate exposure – capturing the importance of non-
teleworkable, non-essential and social sectors – is summarised by:8
𝐸𝑥𝑝𝑜𝑠𝑢𝑟𝑒𝑗 = (1 − 𝑇𝑒𝑙𝑒𝑤𝑜𝑟𝑘𝑎𝑏𝑙𝑒𝑗 ) × (1 − 𝐸𝑠𝑠𝑒𝑛𝑡𝑖𝑎𝑙𝑗 ) × 𝑆𝑜𝑐𝑖𝑎𝑙𝑗
6
However, the combined impact of private debt (household and corporate) pre-crisis poses a larger drag on growth
and thus higher scarring effect compared to public debt alone. Moreover, as suggested by our finding on the role of
public investment in dampening scarring effects, public debt accumulation driven by public investment may play a
mitigating role.
7
The output multiplier of public consumption is known to be much lower than that of public investment. Our results
are also consistent with this empirical regularity.
8
Essential jobs sectors refer to those that were not subject to government mandated shutdowns while social jobs
sectors are those where individuals interact to consume goods.

MALAYSIA
Figure 4. Debt and Scarring in Malaysia
Sources: FAD Global Debt database, BIS, CEIC and IMF staff estimates.
Note: The left hand of the panel shows the cumulative impact of past recessions on potential output growth in log
points accounting for debt accumulation using coefficient estimates from section B. Pre covid-19 figures (right-
hand panels) are from the latest available year, specifically 2019 for public debt and 2016 for corporate and
household debt.

MALAYSIA
The picture highlights that while direct exposure is concentrated in contact-intensive services, such
as hotels and restaurants, many other industries that provide them with inputs (e.g., food, beverages,
and tobacco) are vulnerable to negative spillover effects.9
14. Accounting for these spillovers, every sector of the economy is affected by the
pandemic, albeit with different magnitudes (Figure 6). To measure spillovers through supply
networks, we first define the input purchases of industry j operating in country d from industry i
operating in country c as 𝑛𝑐𝑖𝑑𝑗 according to the OECD’s inter-country input-output tables
(OECD 2018). A Malaysian industry’s ‘upstream domestic’ exposure (i.e., via its Malaysian customer
industries) to pandemic-related restrictions can then be summarized by:
𝑛𝑀𝑖𝑀𝑗
𝑈𝑝𝑠𝑡𝑟𝑒𝑎𝑚𝐷𝑜𝑚𝑒𝑠𝑡𝑖𝑐𝑖 = ∑ ( ⋅ 𝐸𝑥𝑝𝑜𝑠𝑢𝑟𝑒𝑗 )
∑𝑘(𝑛𝑀𝑖𝑀𝑘 + 𝑛𝑀𝑖𝐹𝑘 )
𝑗
where 𝑀 denotes Malaysian industries and 𝐹 denotes the aggregation of foreign industries.
Upstream domestic exposure is thus the average exposure of domestic customer industries,
weighted using their share of purchases in total usage across all industries for both domestic and
export production. Upstream foreign exposure then follows analogously, for foreign customer
industries (note the change in the subscript of the numerator):
𝑛𝑀𝑖𝐹𝑗
𝑈𝑝𝑠𝑡𝑟𝑒𝑎𝑚𝐹𝑜𝑟𝑒𝑖𝑔𝑛𝑖 = ∑ ( ⋅ 𝐸𝑥𝑝𝑜𝑠𝑢𝑟𝑒𝑗 )
∑𝑘(𝑛𝑀𝑖𝑀𝑘 + 𝑛𝑀𝑖𝐹𝑘 )
𝑗
Downstream domestic and foreign exposure (i.e., via suppliers, either in Malaysia or abroad) can then
be measured equivalently, using the average exposure faced by an industry’s suppliers.10 While
services industries are most affected directly (blue bars, bottom section), many manufacturing
industries which are their suppliers are also exposed to knock-on effects (green bars, middle section).
Almost all sectors are exposed to some degree of downstream effects (red bars), as almost all are
customers of an exposed sector – e.g., the computer and electronics sector purchasing from
wholesale trade. In general, exposure is greatest through domestic relationships, except for a few
sectors with high export shares where foreign exposure is more important – e.g., electrical
equipment, computers, and business services.
9
While the focus here is on exposure to pandemic-related restrictions, note that positive demand shocks will also
spread through the network in a similar fashion. For instance, the major increase in exports of consumer electronics
and rubber gloves implies increased demand for those industries which supply inputs to the ‘computers and
electronics’ and ‘rubber and plastics’ sectors.
10
Specifically, industry-wise downstream exposure is the average exposure of supplier industries, weighted by their
share in total supply of inputs to a given industry:
𝑛𝑀𝑗𝑀𝑖
𝐷𝑜𝑤𝑛𝑠𝑡𝑟𝑒𝑎𝑚𝐷𝑜𝑚𝑒𝑠𝑡𝑖𝑐𝑖 = ∑ ( ⋅ 𝐸𝑥𝑝𝑜𝑠𝑢𝑟𝑒𝑗 )
∑𝑘 (𝑛𝑀𝑘𝑀𝑖 + 𝑛𝐹𝑘𝑀𝑖 )
𝑗
𝑛𝐹𝑗𝑀𝑖
𝐷𝑜𝑤𝑛𝑠𝑡𝑟𝑒𝑎𝑚𝐹𝑜𝑟𝑒𝑖𝑔𝑛𝑖 = ∑ ( ⋅ 𝐸𝑥𝑝𝑜𝑠𝑢𝑟𝑒𝑗 )
∑𝑘 (𝑛𝑀𝑘𝑀𝑖 + 𝑛𝐹𝑘𝑀𝑖 )
𝑗
(These two measures are simply the inverse of the upstream measures – essentially reversing the input-output
coefficients 𝑖 and 𝑗 to examine spillovers in the opposite direction, from supplier to customer rather than from
customer to supplier.)

MALAYSIA
Figure 5. Input-Output Structure and Exposure to Pandemic Shocks
Sources: Shibata (2020), OECD (2018), and IMF staff calculations.

Note: The size of the sectors is measured by total output, including both domestic production and exports.
The darker the color, the higher is the exposure score (see text). The arrows flow from input sectors to output
sector and are thicker with the size of the flow. The darker the arrows the higher is the exposure of the
destination industry.
15. The COVID-19 pandemic has disproportionately affected SMEs in the service sector. The
impact has been felt disproportionately by firms in the contact-intensive service sector, which in turn
comprise mainly of small and medium enterprises (SMEs).11 According to SME Corporation Malaysia,
in 2020, SMEs represented a significant share of overall business establishments (1.52 million, or
97.2 percent of the total), and accounted for 7.25 million jobs (about 48 percent of total
employment), 38.2 percent of GDP and 13.5 percent of exports and represent 85.5 percent of the
service sector.12
11
The definition of SMEs since 2013 is based on two criteria. For the Manufacturing sector, they are defined as firms
with sales turnover not exceeding RM50 million or number of full-time employees not exceeding 200, while for the
services and other sectors, they are defined as firms with sales turnover not exceeding RM20 million or number of
full-time employees not exceeding 75.
12
In 2019, SMEs employed 7.3 million workers (48.4 percent of total employment), 38.9 percent of GDP, 17.9 percent
of Exports.

MALAYSIA
16. In the longer-run, foregone education is School Closures During COVID-19

(In percent share of total instruction days between 11 Mar 2020 and 2 Feb 2021)
a major concern. During the first ten months of the
pandemic, schools were closed for 46 percent of
instruction days (i.e., non-holidays), and operated
with limited capacity for a further 18 percent of
instruction days (see chart). This was in line with
neighboring countries, but substantially above the
global and AE averages. As noted in the previous
section, reduced labor productivity is a significant
channel through which scarring effects on output
can occur. Such interruptions to students’ learning,
and the resulting negative effects on long-term human capital in the absence of broad based
educational ‘catch up’ programs, could thus have important implications for long-run output. The
students least able to access remote learning substitutes, such as online or TV/radio broadcast
education, are also more likely to live in rural areas or come from the poorest 40 percent of
households (UNICEF, 2020). This implies an important complementary role for targeted educational
interventions to counter the potential negative consequences for social mobility and thus existing
inequalities.
The Distributional Implications of the Pandemic in Malaysia
17. The pandemic reduced household income, especially in the lower part of the income
distribution and for employees and the self-employed.13 The main sources of household
incomes, paid employment and self-employment, declined by 16.1 percent and 9.7 percent
respectively. Household average gross income therefore decreased by 10.3 percent, driven by the
income loss of employees and the self-employed, mainly through job loss, reduction in hours worked
and skill-related under-employment. Regarding household distribution by decile, while a majority
experienced a decline in income, households in the Bottom 40 percent (B40) and in Middle
40 percent (M40) have experienced the largest decline, leading to income shares of 15.9 percent and
36.9 percent respectively.14 The Top 20 (T20) percent’s income shared rose by 0.4 ppt (compared
to 2019) to 47.2 percent; this group was affected to a relatively smaller extent, with 12.8 percent
moving to M40.
18. The pandemic has disproportionately affected the income and employment of
individuals in the agriculture and services sectors.15 The Department Of Statistics of Malaysia
(DOSM) has released a survey on the effect of COVID-19 on the economy, showing a share of
respondents that have lost their jobs and experienced a severe income loss (more than 50 percent) in
13
Source: Household Income Estimates and Incidence of Poverty Report, Malaysia, 2020.
14
In 2020, there was an additional of 12.5 per cent of households moving to lowest part of the income distribution
with less than RM2,500 (B1) while 20 per cent of households from the M40 group have moved to B40. In addition, the
B40 and M40 income shares have declined by 0.1ppt and 0.3 ppt respectively relative to 2019.
15
This impact was heterogenous across the services sub-sector as discussed below.

MALAYSIA
the service sector of respectively 54.2 percent and 53.6 percent.16 The corresponding numbers are
21.9 percent and 50 percent respectively in the agriculture sector.
Figure 6. Relative Exposure of Malaysia’s Industries to Pandemic Through Domestic and

Foreign Suppliers and Customers
Extraction
Manufacturing
Services
Sources: Shibata (2020), OECD (2018), and IMF staff calculations.
19. Severe income losses were driven mainly by income loss in the service sector and the
agriculture sector. Sub-sectors such as arts, entertainment and recreation, food services, fishing and
transportation were among the most affected. Individuals in the manufacturing sector and in
administrative and support services were among the most protected against job losses.
16
This survey was undertaken online from 23rd-31st March 2020 and covered 168,182 respondents of at least 15 years
old. The DOSM disclaimed that this survey could not be generalized to all Malaysians but could be used to support
analysis of the COVID-19 situation at the time of the survey.

MALAYSIA
20. The self-employed had a Income and Job Losses by Sector: Effect of COVID-19
(In percent of respondents)
particularly high risk of losing their jobs.
The survey shows that about 47 percent of
self-employed reported losing their jobs in
early 2020, about twice the average
proportion for all types of employment
status. Meanwhile private sector employees
were more likely to have a reduction in the
number of hours worked, and public sector
and multinational employees faced the least
risk of losing their jobs.
21. Overall, the sectors with the lowest

ability to work from home (least tele-
workable) were the most at risk of
registering job losses, reduced numbers of
hours worked and severe income losses.
Respondents that reported being unable to
work from home were also most likely to
report severe income loss, the most at risk of
reducing the number of hours worked and
the most at risk of losing their jobs (Figure 7).
They were mainly from sectors such as food
services, livestock, fishing, livestock and
transportation and storage. Rahman et al
Effects of COVID-19 by Employment Status
(2020) estimate that about 64.5 percent of (In percent of respondents)
jobs in Malaysia cannot be performed from

home (after adjusting for internet access) and
that 50.9 percent of jobs require high levels
of physical proximity. A significant proportion
of the population is therefore doubly
vulnerable: vulnerable both ex-ante through
relatively low income and education, and
directly through greater physical exposure to
COVID-19. Indeed, the ability to work from
home is positively correlated with non-
routine cognitive analytical skills (Rahman et
al.,2020).
22. Given the structural pre-pandemic characteristics of Malaysia, risks to inequality are
tilted to the upside. In addition to the recent increase in inequality pre-pandemic, Malaysia’s
structural characteristics point to an upside risk for inequality post-pandemic. As previously
discussed, recent evidence (Furceri et al., 2021b and, Aguirre and Hannan, 2021) show that strong

MALAYSIA
fiscal support and strong initial conditions (defined as low informality, high social protection
spending, high health expenditure and high redistribution) contribute to mitigating pandemic-
induced inequality. Health spending and social protection spending were below the average of Asian
EMs for the most recent pre-pandemic data (Figure 8). Absolute redistribution, measured as the
difference between the market Gini and the net Gini, was also below both the ASEAN and EM
averages in 2019, after excluding Indonesia (which had a negative absolute redistribution score).
Furthermore, shadow economy was among the highest in the region pre-pandemic. The only
mitigating factor is therefore the large fiscal support, estimated to reach 9.6 percent of GDP by
end- 2021 (see Appendix VII). As evidenced by the continued increase in the Gini index in 2020, the
number of structural factors that would contribute to further increases in inequality is higher than the
only mitigating factor (fiscal support). While it is difficult to anticipate with accuracy whether the
large fiscal support may outweigh the impact of structural factors, again given the recent trend, a
prudent approach would suggest considering the case for a rise in inequality.
Text Figure. Balance of Risks to Inequality
High
Strong fiscal informality
support
Low health
spending
Low social
protection
Low
redistribution
D. Conclusions
23. In the medium term, the COVID-19 pandemic is expected to have significant scarring
effects on Malaysia’s potential output, and to increase inequality. Historically, recessions reduce
potential output across the next five years, while pandemics add further harms to the ‘typical’
recession. Interlinkages between sectors imply that the concentrated negative impact in some
sectors will have broader repercussions across the economy. In addition, as evidenced by the recent
increase in inequality in 2020, the pandemic is expected to raise income inequality as vulnerable
households that are self-employed or employed in the agriculture and services sectors will suffer
disproportionately large income and job losses. Further, the structural characteristics of Malaysia
(relatively low social protection spending, including health spending, limited redistribution, and a
large informal sector) could also amplify the impact of the pandemic on income inequality.

MALAYSIA
70
Figure 7. The Pandemic and Related Movement Control Orders Have Disproportionately Affected Sectors
with Low Ability to Work from Home in Malaysia
INTERNATIONAL MONETARY FUND
MALAYSIA
Figure 8. Proxies for Pre-pandemic Structural Characteristics
24. However, well-designed and targeted policies could mitigate the impact of the
pandemic on both output and inequality.
• In the near term, given the uneven exposure to the pandemic, in addition to the announced fiscal
stimulus, authorities could target fiscal support to sectors (including well designed scaling up of
public investment with higher fiscal multipliers) with limited capacity to work from home and
pursue active labor market policies. The latter could facilitate reallocation of labor, limiting the
possible increase in skills mismatch, and boost aggregate demand by targeting those who have
suffered severe income loss in the service and agriculture sectors.
• Social assistance to the most vulnerable. Social protection to the poorest members of the society
and by extension the more liquidity-constrained households, self-employed and SMEs
disproportionately hit by the pandemic would lessen the distributional impacts of the pandemic
in Malaysia. A more targeted approach focused on supporting the poorest members of the
society would also allow a better allocation of the limited resources and achieve even greater
progress in reducing poverty and inequality. Important safeguards include explicit sunset clauses,
rigorous means-testing, monitoring and reporting, and excluding debtors that are unviable.

MALAYSIA
• Structural reforms. In addition, policymakers should focus on strengthening their insolvency

frameworks to address debt overhang through measures that avoid formal bankruptcy or
facilitate recovery after bankruptcy. Structural reforms, centered on reducing the regulatory
burden in the labor and product markets, should be one of the key priorities for medium term
policies. It will also help reduce the size of the informal sector. While the introduction of the
unemployment insurance in Malaysia in 2018 was a major step forward, a significant share of
workers is not covered by the scheme, and that share is likely to increase over time given the
increased incidence of temporary and gig jobs and self-employment. This will also help reduce
the size of informal sector. Finally, judiciously calibrated R&D incentives could help boost the
country’s innovative capacity in the medium term.
• As part of Malaysia’s short-term economic recovery plan, Penjana, authorities introduced

incentives for the upskilling and reskilling of workers. This initiative should be enhanced by
focusing on non-routine cognitive analytical skills, non-routine interpersonal skills, and digital
skills that will help build resilience in the face of rapid technological change and improve the
ability to work from home.
25. Strategies to support corporate sector health through the recovery are essential. Key
principles should guide the eligibility criteria for which firms to assist and the assignment of policies.
These include:
• Limiting potential moral hazard, to ensure firms receiving funds do not misuse them or engage in
risky behavior, via setting terms of compliance and a clear exit strategy.
• Articulating clear eligibility requirements, which would limit adverse selection and scope for
discretion, while preserving fiscal space.
• Facilitating an efficient reallocation of resources in the economy, to raise aggregate productivity as

well as enabling firms to adapt to the post-COVID-19 operating environment.
26. Targeted support is preferred to broad support. Although broad-based (and liquidity)
support is quicker and less administratively burdensome to disburse (and speed was a priority when
the shock first hit), as the economy moves to the recovery phase, the focus should continue with a
better targeting of firms to minimize fiscal costs, preserve fiscal space (Diez et al. 2021,
OECD 2020a, 2020b), and limit governance challenges.
27. The type of support should be linked to the nature of the problem firms are facing. The
general principles follow those in the literature (see Gourinchas and others 2020, IMF 2020a, and
OECD 2020a), namely:
• Firms that were not viable prior to the COVID-19 shock should be encouraged to exit through
liquidation.
• Solvent firms that are facing liquidity difficulties due to the pandemic should be provided
liquidity assistance, such as through soft loans, expenditure deferrals, or debt moratoria.

MALAYSIA
• Firms that have become insolvent due to the pandemic, but are expected to recover post-
pandemic, can be assisted through loans or equity injections.
• For those firms that cannot be supported through liquidity or solvency support, there needs to
be efficient restructuring (to restore viability) or liquidation (where firms should exit) to
encourage a reallocation of resources across the economy. To facilitate quick and low-cost
restructurings, informal out of court resolution frameworks could be simplified and incentivized.
28. The high prevalence of SMEs and informality in Malaysia requires additional
considerations in designing the overall strategy. The predominant share of SMEs in the affected
sectors, and the high degree of informality in business practices, can make ascertaining the true
financial position of such firms difficult, as well as open room for the misdirection and misuse of
funds. Other considerations include the need to preserve employment for low-skilled labor, the
geographic concentration of such firms (e.g., in tourism-dependent areas), and the systemic
importance of some larger firms, and the social costs of loss of employment. This is compounded by
the prevailing high uncertainty due to the pandemic.
• The eligibility criteria could consider firms that generate high social value through externalities
based on their interlinkages with the local economy, particularly employment (for instance SMEs
in the services sector).
• For firms where information on financial health is limited, the size of support could be gradually
extended over the support period, based on the requirement to keep and meet objective
markers.

MALAYSIA
References
Almeida, V., Barrios, S., Christl, M., De Poli, S., Tumino, A., and van der Wielen, W. (2021). “The impact
of COVID-19 on households´ income in the EU”. The Journal of Economic Inequality, 1-19.
Aguirre, J. P. C., and Hannan, S. A. (2021). “Recoveries After Pandemics: The Role of Policies and
Structural Features”. IMF Working Papers, WP/21/181
Bannister, G., Finger, H., Kido, Y., Kothari, S., and E., Loukoianova (2020). “Addressing the Pandemic’s
Medium-Term Fallout in Australia and New Zealand.” IMF Working Papers, WP/20/272
Bernstein, S., Colonnelli, E., Giroud, X., and Iverson, B. (2019). “Bankruptcy spillovers”. Journal of
Financial Economics, 133(3), 608-633.
Blagrave, P., R. Garcia-Saltos, D. Laxton, and F. Zhang, 2015, “A Simple Multivariate Filter for
Estimating Potential Output,” IMF Working Paper WP/15/79.
Bonacini, L., Gallo, G., and Scicchitano, S. (2021). “Working from home and income inequality: risks of
a ‘new normal’ with COVID-19”. Journal of population economics, 34(1), 303-360.
Díez, F., R. Duval, J. Fan, J. Garrido, S. Kalemli-Özcan, C. Maggi, S. Martinez-Peria and N. Pierri, (2021),
“Insolvency Prospects Among Small-and-Medium-Sized Enterprises in Advanced
Economies”, IMF Staff Discussion Note.
Dosi, G., Fanti, L., and Virgillito, M. E. (2020). “Unequal societies in usual times, unjust societies in
pandemic ones”. Journal of Industrial and Business Economics, 47(3), 371-389.
Emmerling, J., Furceri, D., Monteiro, F. L., Pizzuto, P., and Tavoni, M. (2021). “Will the Economic
Impact of COVID-19 Persist? Prognosis from 21st Century Pandemics”. IMF Working
Papers, 2021(119).
Furceri, D., Loungani, P., Ostry, J. D., and Pizzuto, P. (2021a). “Will COVID-19 Have Long-Lasting
Effects on Inequality? Evidence from Past Pandemics”. IMF Working Paper WP/21/127
Furceri, D., Loungani, P., Ostry, J. D., and Pizzuto, P. (2021b). “The rise in inequality after pandemics:
can fiscal support play a mitigating role?”. Industrial and Corporate Change, 30(2), 445-457.
Furceri, D., Celik, S. K., Jalles, J. T., and Koloskova, K. (2021c). “Recessions and total factor
productivity: Evidence from sectoral data”. Economic modelling, 94, 130-138.
Galletta, S., and Giommoni, T. (2020). “The effect of the 1918 influenza pandemic on income
inequality: Evidence from Italy”. Available at SSRN 3634793.
Garber, G., Mian, A., Ponticelli, J., and Sufi, A. (2019). Household debt and recession in Brazil.
In Handbook of US Consumer Economics (pp. 97-119). Academic Press.
Garrido, J. M., Nadeem, S., Riad, N., DeLong, C. M., Rendak, N. and, Rosha, A. (2020). Tackling private
over-indebtedness in Asia: Economic and legal aspects. IMF Working Papers, 2020(172).
Hill, H, Malaysian Economic Development, (2010), ”Looking Backwards and Forward”, Working
Papers in Trade and Development 2010/13, Australian National University.

MALAYSIA
Huidrom, R., M. A. Kose, and F. Ohnsorge. 2016. “Challenges of Fiscal Policy in Emerging Market and
Developing Economies.” CAMA Working Paper 34/2016, Crawford School of Public Policy,
Sydney, Australia.
IMF, 2020a, “Regulatory and Supervisory Measures in Response to the COVID-19 Pandemic,” COVID-
19 Notes.
International Monetary Fund. 2021. “World Economic Outlook: Managing Divergent Recoveries.”
Jordá, O. 2005. “Estimation and Inference of Impulse Responses by Local Projections.” American
Economic Review 95 (1): 161-182.
Kugler, M. D., Viollaz, M., Vasconcellos Archer Duque, D., Gaddis, I., Newhouse, D. L., Palacios-Lopez,
A., and Weber, M. (2021). “How Did the COVID-19 Crisis Affect Different Types of Workers in
the Developing World?” (No. 9703). The World Bank.
Laeven, L., And F. Valencia. 2018. “Systemic Banking Crises Revisited.” IMF Working Paper 18/206,
International Monetary Fund, Washington, DC.
Medina, L., and Schneider, F. (2020). “Shedding light on the shadow economy”. World
Economics, 21(2), 25-82.
Mian, A., and Sufi, A. (2018). Finance and business cycles: the credit-driven household demand
channel. Journal of Economic Perspectives, 32(3), 31-58.
OECD (2018). “Inter-Country Input-Output Tables, 2018 Edition”. Organization for Economic
Cooperation and Development. http://oe.cd/icio
OECD, 2020a, “COVID-19 Government Financing Support Programmes for Businesses”
OECD, 2020b, “Corporate Sector Vulnerabilities during the COVID-19 Outbreak: Assessment and
Policy Responses,” OECD Policy Responses to Coronavirus (COVID-19)
Rahman, A. A., Jasmin, A. F., and Schmillen, A. (2020). “The Vulnerability of Jobs to COVID-19: The
Case of Malaysia”. ISEAS Yusof Ishak Institute. http://hdl.handle.net/11540/12748.
Schmitt-Grohé, S., Teoh, K., and Uribe, M. (2020). “COVID-19: testing inequality in New York City (No.
w27019). National Bureau of Economic Research.
Shibata, I. (2020). “The Distributional Impact of Recessions: The Global Financial Crisis and the
Pandemic Recession.” IMF Working Papers. WP/20/96
UNICEF (2020). “COVID-19: Are children able to continue learning during school closures? A global
analysis of the potential reach of remote learning policies using data from 100 countries.”
New York: United Nations Children’s Fund.

MALAYSIA
Appendix VI. Risk Assessment Matrix1

Risks Likelihood and Transmission Expected Impact of Risk Recommended Policy Responses
External
High High With fiscal buffers decreasing following the
Outbreaks of Rapidly increasing High household debt is a vulnerability initial pandemic policy response and the impact
lethal and hospitalizations and deaths, due and a protracted impact of COVID-19 of COVID-19, the ability of macroeconomic
highly to low vaccination rates or can be expected to constrain domestic policies to provide a cushion against a
contagious caused by vaccine-resistant consumption and lead to a protracted slump is narrowing. On the fiscal
COVID-19 variants, force lockdowns and deterioration of bank asset quality. side, provide targeted fiscal support to directly
variants lead increased uncertainty about the Protracted measures to contain the impacted households and firms, while
to course of the pandemic. Policies pandemic can exacerbate scarring in developing a credible medium-term plan for
subpar/volat to cushion the economic impact the real economy. Higher financing fiscal consolidation. Continued emphasis on
ile growth, are prematurely withdrawn or costs for the sovereign; a relatively critical infrastructure projects and structural
with constrained by lack of space. high public debt; and realization of reforms to enhance productivity. Allow FX
increased contingent liabilities in the absence of flexibility to continue acting as a shock
divergence a credible medium-term consolidation absorber. On the macro-financial side, continue
across plan, would exacerbate concerns about to ensure sufficient liquidity, including more
countries. public debt sustainability and could accommodative monetary policy, combined
lead to an adverse feedback loop of with close monitoring of asset quality,
spikes in domestic interest rates and especially with a view to assessing viable from
exit of foreign investors. non-viable firms. The BNM has room to further
cut its policy rate if downside risks materialize.
High High
Extended COVID Persistent disruptions in With a highly open economy and as a With Malaysia almost fully vaccinated, a careful
global the production and shipment of key player in global supply chains of and orderly reopening of the economy
supply components caused by semi-conductors, a prolonged covid- especially targeting sectors well integrated into
chains lockdowns and logistical 19 pandemic threatens to negatively the global value chains would help mitigate the
disruptions. bottlenecks continue until 2023. impact economic activity through its impact of this shock.
impact on the
Manufacturing/Electronics sector and
trade.
Medium Medium
Abrupt A combination of a sharper- China is Malaysia’s largest trading The exchange rate should be the first line of
growth than-expected slowdown in the partner. Staff estimated in the 2012 defense to absorb the shock, using reserves to
slowdown in property sector, more frequent Spillover Report that a 1 percentage smooth excessive volatility. Monetary easing
China Covid-19 outbreaks, and point investment slowdown in China provided it is consistent with the inflation
inadequate policy responses would reduce Malaysia’s growth by output trade-off can also be considered.
result in a sharp slowdown of 0.6 percentage points. The impact Targeted fiscal policy support can also play
economic activity. would be compounded by spillover some role in minimizing scarring impact,
effects in other Asian countries although the fiscal space is at-risk. Structural
strongly integrated with both China policies could be implemented to minimize
and Malaysia, particularly ASEAN scarring and rebalance growth towards
countries. domestic demand.
Medium/Low Medium/High The exchange rate should be allowed to act as
De- A fast recovery in demand amid Impact on Malaysia would be through a shock absorber, intervening only to smooth
anchoring of a lagging supply-side response the narrowing difference in the interest excessive volatility. Monetary policy should be
inflation leads to a rapid de-anchoring of rate, the resulting outflows and calibrated to balance the trade-off between
expectations inflation expectations, which depreciation of the Ringgit and, supporting growth and managing capital
in the prompts central banks to through the upward pressure on the outflows. There is scope to provide liquidity
U.S. and/or tighten policies abruptly. The bond yields. High public debt is a support in foreign currency to maintain
advanced resulting sharp tightening of vulnerability. Limited external financing financial stability. With a fiscal space at-risk, any
European global financial conditions and is a mitigating factor. temporary fiscal expansion should be well
economies spiking risk premia lead to targeted and anchored in a credible medium
currency depreciations, asset term fiscal consolidation plan. Liquidity support
market selloffs, bankruptcies, (including FX) could be provided. Temporary
sovereign defaults, and knock- outflow CFMs could be also considered under
on effects imminent crisis circumstances, as part of a
broader policy package in line with the Fund’s
institutional view (IV).
1
Prepared by Kodjovi Eklou. The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline
path (the scenario most likely to materialize in the view of IMF staff). The relative likelihood of risks listed is the staff’s
subjective assessment of the risks surrounding the baseline (“low” is meant to indicate a probability below
10 percent, “medium” a probability between 10 and 30 percent, and “high” a probability of 30 percent or more). The
RAM reflects staff views on the source of risks and overall level of concern as of the time of discussions with the
authorities. Non-mutually exclusive risks may interact and materialize jointly.

MALAYSIA
External
Rising and High Low Rebuild fiscal buffers as this is a transitory
volatile food Commodity prices are volatile This would happen in the context of shock amid uncertainties and
and energy and trend up amid pent-up increased volatility in oil prices due to fiscal reforms to continue reducing the reliance
prices. demand and supply disruptions, the ongoing conflict in Ukraine which on oil revenues, such as broad-based taxes, are
conflicts , or a bumpy transition could potentially weigh on global critical. Investment in infrastructure and other
to renewable energy sources. growth. Further, as Malaysia’s role as productivity-boosting structural reforms could
This leads to bouts of price and net energy exporter has been also help.
real sector volatility diminishing over time, this could also
represent a negative shock to the
economy.
Natural Medium Medium Continue and accelerate the development and
disasters Higher frequency of natural Severe flood events could destroy implementation of mitigation and adaptation
related to disasters causes severe infrastructure and capital and plans, including 12MP improvements to early
climate economic damage. necessitate relief and recovery warning systems and disaster response
change spending, negatively impacting output measures.
and reducing fiscal space
Domestic
Fiscal risks Medium Medium/High The authorities’ ability to mount countercyclical
from public A prolonged COVID-19 Higher financing costs for the responses would be boosted by medium-term
debt and pandemic could trigger sovereign; a relatively high public debt; fiscal consolidation most notably through a
contingent realization of risks that would and realization of contingent liabilities medium-term revenue strategy (MTRS).
liabilities have adverse consequences for would exacerbate concerns about Continued progress in reforming fiscal
(Short- to fiscal policy, raising the public debt sustainability and could institutions can mitigate the impact, including
medium- sovereign’s financing cost and lead to an adverse feedback loop of improving the fiscal risks management
term). requiring even stronger fiscal spikes in domestic interest rates and framework and publication of annual fiscal risks
adjustment in the medium-term exit of foreign investors. statement, along with increased transparency
to restore fiscal sustainability. of GLC operations.
Global Medium Medium/High Continued investment in the cyber security
information A disruption in global Disruptions in secure remote work strategy. Existing IT security frameworks could
infrastructur information systems (from an from home, theft of personal be strengthened, and new lines of defense
e failure unintended error, natural information, SWIFT fraud, hacked could be built to eliminate the risk of such
disaster, or knock-on effects of crypto-asset exchanges, and business attacks and minimize their impact in line with
widespread energy shortages) disruptions across the supply chain the recent FinTIP.
and/or cyber-attacks on critical could materialize.
infrastructure and institutions
trigger financial instability or
widespread disruptions in
socio-economic activities and
remote work arrangements.

MALAYSIA
Appendix VII. Optimal Fiscal Policy in Malaysia1

Malaysia is currently at an important turning point with high vaccination rates supporting the recovery
momentum, but the recovery is still uneven, output remains well below potential, and scarring risks are
large. The challenge is one of identifying and embarking on the best path for fiscal policy. So far in the
pandemic, Malaysia’s fiscal policy response appropriately prioritized supporting people and the
recovery at the expense of narrowing its at-risk fiscal space and thus its ability to respond to future
shocks. In short term, the analysis based on a stochastic structural model calibrated for Malaysia,
suggests a need to continue supporting the recovery through a well-designed and targeted fiscal
expansion. Beyond the near term, and like other countries with fiscal vulnerabilities, Malaysia needs to
embark on a credible and growth-friendly fiscal consolidation path that would put debt on a
downward trend and rebuild fiscal buffers.
A. Fiscal Policy Pre-Pandemic
1. Malaysia started the pandemic with existing vulnerabilities but with mitigating factors
as well. Fiscal space at the start of the pandemic was assessed to be at risk as pre-existing
vulnerabilities such as high contingent liabilities (20 percent of GDP, out of which 13 percent of GDP
are committed) raised fiscal risks. Debt profile remains favorable with the majority of debt issued
domestically, at long maturities, and in local currency. While the cost of debt is not high, debt
service has constituted an increasing share of revenues, reaching 15 percent in 2020 and projected
to use further in 2021 and 2022, in part due to Malaysia’s narrow revenue base.
2. In the past, fiscal policy appropriately reacted to the increases in debt by

consolidating. Looking at the reaction of the cyclically adjusted primary balance (CAPB) to lagged
public debt during 1992-2019 can give insights into past consolidation efforts to put debt on
downward path. A positive reaction means that fiscal policy is sustainable because debt increases
are followed by fiscal consolidation. In Malaysia, we find a weak positive relationship suggesting that
higher public debt is associated with higher CAPB primary balances. The relationship is stronger in
the pre-global financial crisis (GFC) period.
Cyclically Adj. Primary Balance & Public Debt, 1992-2019 Cyclically Adj. Primary Balance & Public Debt, 1992-2009
(In percent of GDP) (In percent of GDP)
6 6
5 5
1992 1995 1992
1995 4
4
Cyclically Adjusted primary Balance
Cyclically Adjusted primary Balance
3 3 1998
2 2
2019
1 1
0 0
2015
1999
-1 -1 2007
2007
-2 -2 2001 2004
2003 2011
-3 2009
-3
-4 -4
-5 -5
25 28 31 34 37 40 43 46 49 52 55 58 61 64 67 70 25 28 31 34 37 40 43 46 49 52 55 58 61 64 67 70
Lagged Public Debt
Lagged Public Debt
Sources: IMF staff calulcations. Sources: IMF staff calculations.
1
Prepared by Ghada Fayad. Special thanks go to Anh Nguyen and Jean-Marc Fournier for their helpful insights and
technical assistance on the Fournier (2019) optimal fiscal stance model.

MALAYSIA
B. Pandemic Fiscal Policy Response
3. Despite at-risk fiscal space, the authorities responded boldly to the pandemic. To
finance economic
stimulus COVID-Related Above-the-Line Spending, (2020-2022)
packages aimed RM billion % of GDP
at addressing the 2020 2021 2022 Total 2020 2021 2022 Total
COVID crisis, a
COVID-SPENDING 38 39 23 100 2.7 2.5 1.4 6.6
Current 35 38 21 2.5 2.5 1.3
COVID-19 Fund Wage subsidies 13 10 3 0.9 0.6 0.2
was established in Social transfers 16 17 8 1.1 1.1 0.5
Upskilling programs 0.3 0.4 1.0 0.0 0.0 0.1
September 2020 SME grants 3 3 0 0.2 0.2 0.0
with a limit of Other 3 7 9 0.2 0.5 0.5
Capital 3 1 2 0.2 0.1 0.1
RM45 billion,
which was increased in December 2020 to
Discretionary Fiscal Response to the COVID Crisis, 2020-2021
65 billion and more recently to 110 billion to (in percent of GDP)
account for COVID- related spending 30

Equity, loans, and guarantees
commitments in the 2022 Budget. In terms of 25 Additional spending and foregone revenue
allocation of spending across years, 20
RM38 billion spent in 2020 under five stimulus 15
packages, RM39 billion is envisaged to be 10
spent in 2021 with an original RM17 billion 5
allocated in the 2021 Budget and four 0

Vietnam
Thailand
China
Indonesia
India
Asia EM
Asia AE
Philippines
Malaysia
additional spending packages, and
RM23 billion is allocated for 2022. This sums Sources: Database of Country Fiscal Measures in Response to the COVID-19 Pandemic; and IMF staff estimates.
up to a total of RM100 billion to be spent

from the fund over 2020-2022, leaving a RM10 billion buffer for contingencies or additional needed
spending in 2022. In terms of allocation of spending categories, most spending has been on cash
transfer programs and wage subsidies which accounted for more than half of total spending.
In 2022, an increasing share of the allocation will be spent on upskilling programs, social assistance
support to vulnerable groups, and SME financing. Below-the-line financing included 3.5 percent of
GDP in loan guarantees in 2020 of up to 80 per cent of loan amounts for the purpose of financing
working capital requirements for businesses affected by the pandemic. With several tax
relief/exemption measures extended, including in
Pre- and Post- COVID Federal Government Deficit and Debt
the 2022 Budget, foregone revenues are estimated (in Percent of GDP)
80 0
to have reached about 0.8 percent of GDP 67.9 67.7
70 -1
over 2020 and 2021. 60 58.0
63.2
62.1 63.4
65.0
-2
50 52.7 52.6 52.1 51.8
4. The strong fiscal response widened 40 -3.2

-3.0 -3.0
-3
-3.4
-4
deficit and debt levels, and the debt ceiling was 30
Debt pre-COVID
-5
twice raised by a total 10 percentage points. The 20 Debt post-COVID
Effective debt ceiling
Deficit pre-COVID (RHS) -6
increase in deficit and debt by about 3 and
10
Deficit post-COVID (RHS) -6.1
-6.4 -6.2 -6.4
0 -7
10 percentage points of GDP is similar in 2007 2009 2011 2013 2015 2017 2019 2021
magnitude to what happened at the time of the Sources: IMF staff calculations.

MALAYSIA
GFC and is also comparable to the increase in debt levels in emerging markets and middle-income
countries seen post COVID. The increase is also significant when compared to the pre-COVID fiscal
policy path. Both the GFC and the current crisis saw increases in the debt ceiling by a total
10 percentage points, keeping actual debt below the effective limit in the baseline.
C. Malaysia’s Envisaged Fiscal Path: 2022 Budget
5. With recovery, resilience and reforms as overarching themes, the 2022 Budget remains
focused on supporting the nascent recovery and minimizing pandemic long-term scarring
while at the same time lifting-off a cautious adjustment path. It foresees a narrowing of the
overall deficit to 6.1 percent of GDP in 2022, down from 6.4 percent in 2021, suggesting a mildly
contractionary fiscal stance in 2022. Underlying this decline are conservative revenue projections
and the new, yet lower, COVID-19 allocation for 2022 compared to that of the previous two years.
The bulk of the 2022 spending allocation is on cash assistance to vulnerable groups and wage
subsidies to hard-hit sectors, which will also benefit from tax relief measures. The allocation is
appropriate to address rising inequality post pandemic. While the COVID-19 fund ceiling and
lifespan have been extended to RM110 billion until end 2022, total projected spending since 2020 is
expected to reach RM100 billion, providing RM10 billion buffer for contingencies. In line with the
12th Malaysia Plan (12MP), development expenditure in the 2022 Budget is projected to rise
significantly in 2022 and average 4.5 percent of GDP over the medium term, mostly directed into
environmentally friendly projects with high multiplier effect.
6. The 2022 Budget introduced targeted, mostly one-off, tax measures to raise revenues.
These measures are to be complemented by more permanent measures that would address
Malaysia’s long-standing revenue weakness under the medium-term revenue strategy (MTRS)
umbrella. The windfalls from such measures, estimated at 0.3 percent of GDP, were conservatively
excluded from revenue projections, and are planned to be used to reduce the deficit if they
materialize. They include a one-time special tax for high-income companies,2 and a Special
Voluntary Disclosure Program (SVDP) for indirect taxes. Other measures were targeted to improving
tax compliance including a tax compliance certificate as a pre-condition on tenderers to participate
in government procurement, and implementation of the Tax Identification Number. A welcome and
long-awaited review of the tax incentive system is underway under the MTRS.
7. Beyond 2022, the Budget confirmed the government’s commitment to medium-term

consolidation to rebuild fiscal buffers, but through an initially gradual path and without
clarity on underlying measures. The overall fiscal deficit is projected to average at 5 percent of
GDP for the 2022 – 2024, compared to a target 4.5 percent during 2021-2023 as per 2021 Budget,
and to decline further to 3.5 percent by 2025 as per the 12MP targets. While the initial gradual
deficit reduction is mostly driven by the projected recovery and the expiration of COVID-19 Fund,
achieving the 3.5 deficit target by 2025 will have to be supported by additional measures. Even
though it was noted that the government aims to gradually reduce debt levels and affordability with
2
The tax will be introduced for companies that generate in 2022 income above RM100 million, which will be taxed at
33 percent instead of the blanket 24 percent rate.

MALAYSIA
realistic but firm debt reduction targets to ensure fiscal sustainability, no quantification of such
targets was provided.3
D. Optimal Fiscal Stance
8. Fiscal policy stance is assessed with a stochastic structural model whereby a forward-
looking government maximizes utility under a debt constraint.4 The model aims to strike a
balance between the objectives of economic stabilization and debt sustainability. The government
decides the fiscal stance, defined as a change in the structural primary balance. The model features
(i) feedback effects between fiscal policy and output whereby the primary balance has an effect on
output (through cycle-dependent fiscal multiplier), and the output has in turn an effect on the
primary balance through automatic stabilizers, (ii) hysteresis effects where recessions reducing
potential output, reflecting human and physical capital losses of economic downturns, and (iii) fiscal
policy being constrained by adverse effects of higher debt where the interest rate is a rising function
of debt and, at high debt levels, the government faces a stochastic risk of losing market access. In
addition, fiscal policy is subject to an implementation lag, the government decides its fiscal stance
one year ahead in the model. The government does not know the position in the cycle in real time
and can only forecast it. Moreover, changing fiscal policy entails a cost, reflecting implementation
costs of spending reforms or tax uncertainty costs. The model also incorporates supply constraints,
suggesting a limit to the ability of fiscal policy to close the gap.
9. Key model results suggest that while governments should countercyclically smooth
the cycle, highly indebted government should react less to adverse shocks. The model is
analogous to Deaton (1991) buffer stock model of the consumer, applied to the government. A low
debt level is like a buffer, as the government has the possibility to increase debt in case of a shock
without paying excessive interest rates or facing market-access risk. The government should thus
generate surpluses to restore buffers when public debt is high. Highly indebted governments should
react less to shocks. When the debt buffer (the difference between current debt level and levels at
which debt is too much at risk) is small, the probability of market stress is high and the marginal
value of an extra unit of buffer is large. This provides an incentive to preserve buffers to guard
against future shocks. As a result, when debt is high, the optimal policy response to offset a negative
shock is smaller than when debt is low.
10. As many other emerging market economies, Malaysia fiscal policy faces a trade-off
between achieving a strong, broad-based and durable recovery and ensuring debt is on
sustainable path. We calibrate the model to Malaysia, using Malaysia specific historical data and
assumptions on some model parameters, to infer the optimal fiscal policy response at this juncture.
Key assumptions include:
3
Staff’s baseline projections reflect a gradual decline in the fiscal deficit over the medium term, broadly in line with
the authorities’ targets up until 2024, but deviates from authorities’ path from 2025 as the 3.5 deficit target is not
underpinned by measures.
4
See Fournier (2019) and Fournier and Lieberknecht (2020) for model details.

MALAYSIA
• Elasticity of interest rate to debt level. This Determinants of 10-Year LC Bond Yields - EMDEs
(Time-varying coefficients on relative debt to GDP; controls for time FEs and inflation)
parameter represents the impact of debt 1.5 2
All countries APD (right scale)
increases on government bond yields. Chapter
1
2 of the 2021 October Fiscal Monitor finds that 1.5
interest rate sensitivity to debt has been on a 0.5

1
declining trend, suggesting increased debt- 0
carrying capacity. For emerging markets and 0.5

-0.5
developing economies (EMDEs) in particular, a
fundamentals-based asset valuation model, -1
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020
0
with time-varying coefficients for both absolute Sources: IMF staff calculations.
and relative debt indicators, is estimated to

show that both local currency (LC) and foreign currency government bond yields have become
less responsive to debt indicators as well as country fundamentals. The same model is estimated
by adding a dummy for the APD region, and shows that the sensitivity of LC debt in the region
has gone down from about 1.5 after the GFC to 0.5 in 2021.5 We conservativity assume the
elasticity at 1.5, noting that model results are not very sensitive to changes in this parameter.6
Overall, as argued in the FM, results on higher debt tolerance should be interpreted with caution
as the drop in the correlation since the global financial crisis coincides with a period of ample
global liquidity and could reverse should liquidity reduce, particularly in light of upcoming
tightening of monetary policy in AEs.
• Debt limit: which is the debt level at which there is risk of loss of market access. For Malaysia, we
use the effective debt limit which in the long run stands at 67 percent of GDP.
• The fiscal multiplier. The fiscal multiplier calibration reflects the country’s economic structure
such as trade openness, exchange rate flexibility, and labor market rigidity, as well as the
country’s business cycle and monetary policy stance. Using Batini et al. (2014) bucket approach
would put Malaysia in the low multiplier bucket (multiplier 0 to 0.3). Dime et al. (2021) estimate
higher multipliers for the Asian countries, ranging from 0.73 to 0.88. In light of this, and with the
planned scaling up of public investment with high multiplier effect, we put Malaysia’s multiplier
in the “medium-multiplier” group at 0.6.
• Growth-adjusted interest rate. Long-run potential growth is assumed at 2 percent, real effective
interest rates and population growth rates at their long-run value (as per DSA assumptions) of
3.5 and 1 percent respectively. It should be notes that Malaysia’s interest-rate growth differential
has been negative historically (except during crisis years) which contributed favorably to debt
dynamics.
5
Thanks go to Andresa Lagerborg for running the FM regression model for the APD region.
6 The reason for the low sensitivity is that a higher elasticity of interest rates to the debt level has two effects that, in
this specific exercise, broadly offset each other: (i) it raises the marginal cost of a given increase in debt (leading the
government to target a lower debt level); but (ii) it lessens the surplus needed to reduce debt (dampening the debt
aversion effect induced by (i)) because the interest rate burden drops faster when debt declines.

MALAYSIA
• Automatic stabilizer is set at 0.2, the historical semi elasticity of the primary balance to the
output gap for Malaysia. Data are based on the macroframework projections of the current
policy scenario.
• Other model parameters such as the welfare function parameters (discount factor, risk aversion,
labor elasticity etc.) are standard in the literature. The model also features an adjustment cost
reflecting the difficulty of implementing effectively a large fiscal stimulus, and of reversing such
a stimulus. The adjustment cost parameter is set at 3. This is a moderate adjustment cost as the
model can recommend quite a sizeable adjustment if the previous primary balance level was far
from appropriate. One can hardly infer this parameter from historical data as one cannot exclude
that the observed degree of fiscal inertia reflects suboptimal political constraints. The two
hysteresis parameters, namely the size of hysteresis and the output gap threshold below which
hysteresis affects potential output, are calibrated 10 percent and -1 percent.
11. The model provides support for additional stimulus in the short run followed by fiscal
consolidation over the medium term. The larger deficits in the near term suggested by the model
indicate a stronger focus on narrowing the still very negative output gap in 2022 and 2023 and
minimizing hysteresis and the corresponding economic scarring until the pandemic is contained.
Relative to the baseline, the model recommends more stimulus by about 4 pp of GDP. After 2023,
the model advice recommends a gradual fiscal adjustment. In contrast to the stable path of public
debt in the current policy scenario, the model discerns a need to anchor public debt on a downward
path over the medium term and rebuild fiscal buffers to create room for policy support in case
further shocks arise. The model’s recommendation for medium-term fiscal adjustment is driven by a
need to stabilize debt and rebuild fiscal buffers, and in that respect the consolidation is about 2.9 pp
steeper than the passive baseline, and would put debt on a firm downward trend.
12. Staff recommended path is for a smaller stimulus and consolidation relative to the
model’s optimal path. Under such path, the fiscal stance would be looser than baseline by about 2
p.p. cumulatively in 2022 and 2023, and tighter in the medium term relative to baseline about 3 p.p.
While not undermining the model optimal recommendation, this alternative smoother path is more
cognizant of Malaysia’s at-risk fiscal space amid a protracted pandemic that might necessitate more
spending down the road, and of the practical and feasibility challenges of embarking on a large
stimulus at this stage of the pandemic, as well as of the later unwinding such stimulus.
13. These results are generally robust to sensitivity checks. To check the sensitivity of the
advice to assumptions, we re-run the model by changing key model parameters and find that the
argument for more near-term fiscal support broadly holds under most of the alternative parameters.
First model results are not particularly sensitive to parameters governing market access risk such as
changes in sensitivity of interest rate to debt as noted above, nor to the debt limit. This is because
the optimal policy reacts preemptively to contain the interest rate burden, before being too
constrained by the debt limit. Second, the model recommendation for the primary structural balance
for 2022 in an alternative scenario without scarring is very similar to the baseline (just 0.35 pp
difference), illustrating that the main motivation for additional stimulus is to avoid hysteresis. Third,
if the fiscal multiplier is higher (respectively, lower), the same economic output can be achieved with
less (respectively, more) fiscal stimulus.

MALAYSIA
Text Figure. Optimal Fiscal Stance-Model and Staff Recommended Paths

Structural Primary Balance Federal Government Debt
(in Percent of GDP) (in Percent of GDP)
2 70
1
65
0
-1 60
Model Advice
-2
55
Baseline
-3 Model Advice
Staff Advice
Baseline 50
-4
Staff Advice
-5 45
2019 2020 2021 2022 2023 2024 2025 2026 2027 2019 2021 2023 2025 2027 2029 2031
Output Gap Fiscal Impulse

(in percent of potential GDP) (change in structural primary balance)
1 4
3
0
2
-1
1
-2 0
Model Advice -1
-3
Baseline -2 Model Advice
-4 Staff Advice
Staff Advice -3
Baseline
-5 -4
2019 2020 2021 2022 2023 2024 2025 2026 2027 2020 2021 2022 2023 2024 2025 2026 2027
E. Link to Fiscal Space Assessment
14. While Malaysia’s fiscal space has been assessed to be at risk, staff is of the view that it
affords Malaysia enough room to embark on the recommended marginal near-term
expansion. Despite the step increase in public deficit and debt since the pandemic, and the pre-
existing fiscal risks of large external financing needs7 and contingent liabilities, positive dynamics for
Malaysia’s fiscal space are manifested in its low gross financing needs, favorable debt profile
including extended debt maturities and a greater share of domestic and local currency borrowing,
historically favorable negative interest rate-growth differentials, as well as lack of demographic
pressures. Malaysia also started the pandemic with a fiscal space at-risk assessment, however the
twice-increased debt ceiling since 2020 and ample liquidity in the domestic market allowed Malaysia
to mount a strong fiscal response thus far without endangering market access nor debt
sustainability, and staff is of the view that it could continue to do so in the near future. The cautious
7
Please refer to the external DSA appendix XI for a discussion on the mitigating factors for this vulnerability.

MALAYSIA
recommended fiscal stimulus is however cognizant of the protracted nature of the pandemic and to
safeguard space for potential future spending needs.
Text Table.
FiscalFiscal
SpaceSpace Assessment:
Assessment: Relevant
Relevant Indicators
Indicators for Malaysia
for Malaysia
Favorable debt dynamics: high share of debt: High contingent liabilities

Held domestically
Issued in local currency
At longer maturites
Negative interest rate growth differentials Large external financing requirements
Low public gross financing needs Increase in debt post-pandemic
Reasonable market access costs
Lack of demographic pressures
Track record of fiscal prudence
15. In the current conjuncture of the aftermath of a severe negative shock and lingering
negative output gap, fiscal inaction or abrupt consolidation could actually reduce fiscal space
by dampening growth. Alternatively, the recommended temporary stimulus could create fiscal
space and improve medium-term debt prospects, if used wisely as advised by staff including on
targeted transfers, to fund investment in productive infrastructure, support structural reforms, and
help repair private balance sheets. As growth returns to potential, fiscal stimulus loses its
effectiveness while the cost of fiscal consolidation diminishes, and it becomes optimal to embark on
a fiscal adjustment path that would rebuild space while putting debt on a firm downward trend.
F. Conclusions
16. Malaysia’s fiscal prudence over the last decades has afforded it space for a strong
response to the pandemic so far but more needs to be done to both minimize scarring effects
and rebuild buffers. A stochastic structural model calibrated for Malaysia suggests that the optimal
fiscal stance is one that involves higher spending in the near term relative to the 2022 Budget
baseline, but that would also involve more consolidation effort over the long term to put debt on a
firm downward trend and rebuild fiscal buffers.

MALAYSIA
References
Batini, N., L. Eyraud, L. Forni, and A. Weber, 2014, “Fiscal Multipliers: Size, Determinants, and Use in
Macroeconomic Projections,” IMF Technical Notes and Manuals 14/04.
Deaton, Angus S. 1991. "Saving and Liquidity Constraints," Econometrica 59 (5): 1221-48.
Dime, R., E. Ginting, and J. Zhuang, 2021, “Estimating Fiscal Multipliers in Selected Asian Economies,”
ADB Economics Working Paper Series, No. 638.Fournier, J.M., 2019a, “A Buffer-Stock Model
for the Government: Balancing Stability and Sustainability,” IMF Working paper, No. 19/159.
–––––––, 2019b, “The Appropriate Fiscal Stance in France: A Model Assessment”, IMF Selected Issues,
No. 19/246.
Economic Planning Unit, Prime Minister’s Department, Malaysia (2022), Twelfth Malaysia Plan 2021-
2025 - A prosperous, Inclusive, Sustainable Malaysia. Retrieved from Twelfth Malaysia
Plan, 2021-2025 (epu.gov.my).
Fournier, J.M. and P. Lieberknecht, 2020, “A Model-Based Fiscal Taylor Rule and a Toolkit to Assess
the Fiscal Stance,” IMF Working paper, WP/20/33.
International Monetary Fund, 2021, October 2021 Fiscal Monitor, Chapter 2Ministry of Finance,
Malaysia (2022). 2022 Fiscal Outlook and Federal Government Revenue Estimates. Retrieved
from https://budget.mof.gov.my/2022/index-en.html

MALAYSIA
Appendix VIII. Fighting Climate Change in Malaysia1

While Malaysia is less vulnerable than many of its neighbors, there remain significant climate risks,
particularly flooding, cyclones and chronic heat stress. These threaten both coastal tourism and urban
areas, and are likely to affect the poorest groups in society disproportionately. Malaysia emits
approximately 0.7 percent of global CO2, primarily from the energy sector. This appendix aims to first
establish stylized facts about Malaysia’s vulnerability and contribution to climate change, and to take
stock of the authorities’ climate goals and commitments. It then considers policy responses across
mitigation and adaptation, as well as the role of the financial sector, taking into account both current
plans and best practice internationally.
A. Context
1. While Malaysia is less vulnerable than many of its neighbors, there remain significant
climate risks, particularly flooding, cyclones and chronic heat stress (Figure 1). The Economic
and Social Commission for Asia and the Pacific estimates current annual losses in the Asia-Pacific
region from both hydrometeorological and geophysical natural hazards to be around
US$780 billion, rising to US$1.4 trillion in the worst-case scenario (ESCAP, 2021). Malaysia is
relatively less exposed, with at least 115 other countries globally suffering more from extreme
weather events between 2000 and 2019.2 Dasgupta et al. (2009) assess that one meter of sea-level
rise could increase the 1 in 100-year storm surge impact zone in Malaysia by around 24 percent, and
increase the population affected by around 34 percent. Under the Intergovernmental Panel on
Climate Change (IPCC)’s Representative Concentration Pathway (RCP) 8.5 high emission scenario,
average daily maximum temperatures surpass 33°C by the end of the century (WBG Climate Change
Knowledge Portal, 2021), risking a range of severe heat-related illnesses and injuries. Such
temperature rises could also place up to 43 million people in Malaysia at risk of malaria, up from
a 1961-2000 baseline of 17.6 million (WHO, 2015). Many of these climate risks also interact, for
instance cyclones causing floods which spread communicable diseases, creating the risk of multiple
overlapping crises.
2. These risks threaten both coastal tourism and urban areas, and are likely to affect the
poorest groups in society disproportionately. Prior to the pandemic, The World Travel and
Tourism Council estimated that the travel and tourism sector in Malaysia constituted 11.7 percent of
GDP and accounted for 15.1 percent of total employment in 2019 (WTTC, 2021). Increased
inundation risks threaten valuable tourist infrastructure in coastal regions, while global temperature
changes could affect the relative desirability of different areas. Rising temperatures are compounded
by Urban Heat Island (UHI): dark surfaces, air pollution and lack of vegetation and local heat sources
have been observed to push the temperature in Kuala Lumpur 4-6°C above rural surroundings
1
Prepared by Alexander Copestake and Ghada Fayad.
2
Ranking from the Germanwatch Global Climate Risk Index, which examines 180 countries (Eckstein et al., 2021).

MALAYSIA
(Elsayed, 2012). Poorer communities are least able to invest in flood defenses or air conditioning,
and are more likely to work in manual labor occupations which are most vulnerable to heat stress.
3. Malaysia emits approximately 0.7 percent of annual global CO2, primarily for
electricity, heating and transportation (Figure 1). Malaysia accounts for 0.35 percent of
cumulative historical CO2 emissions globally, in line with ASEAN neighbors Thailand (0.43 percent)
and the Philippines (0.2 percent), with electricity, heat, transport and manufacturing the largest
emitters (Ritchie and Roser, 2020). The ambitious Twelfth Malaysia Plan aims for transformation to a
high-income carbon-neutral economy. Advancing sustainability is one of three core themes,
focusing on advancing green growth while enhancing energy sustainability and transforming the
water sector. The government initially committed to an unconditional 35 percent reduction in
greenhouse gas intensity by 2030, relative to 2005, before strengthening this to 45 percent in
July 2021. While this is relatively stringent among ASEAN nations (see Table 1), this is not ambitious
in absolute terms, as discussed in the next section. Despite rapid investment in renewable electricity
capacity over the last ten years, including relative to some neighbors, the total absolute stock
remains small. However, the PM pledged in September 2021, ahead of COP26, to achieve net zero
emissions as early as 2050 and to cease construction of new coal-fired power plants.
B. Mitigation
4. Malaysia faces difficult policy decisions on how to promote emissions reduction,

particularly in the energy sector. The 11th Malaysia Plan made significant progress on mitigation,
including through expanding renewable energy capacity, reducing waste and increasing
government green procurement. A key component of the 12th Malaysia Plan (12MP) is the
development of an NDC roadmap, while the Ministry of Environment and Water’s Long-Term Low
Emission Development Strategy, due by the end of 2022, will outline plans for achieving net zero.
The Ministry of Finance and Bursa Malaysia are currently investigating a range of carbon pricing
options, including a carbon tax and emissions trading scheme (ETS), in collaboration with other
government agencies and the World Bank. Energy-related CO2 emissions accounted for most of
Malaysia’s greenhouse gas (GHG) emissions
GHG Emissions by Gas and Sector in 2018
in 2018. Within the energy-related emissions, (in mtCO2e)
300
power generation accounted for 48 percent of CO₂ CH₄ N₂O F-gases
Malaysia’s emissions, transportation 25 percent,

250
industry (manufacturing and construction) 200
25 percent, and residential 1 percent. Combustion 150
of coal, natural gas, and gasoline accounted for 39, 100
29, and 16 percent of energy-related CO2 50
emissions respectively. Promoting a rapid transition 0

Energy Industrial Agriculture LULUCF Waste
to cleaner energy sources is a key challenge that process
Sources: IMF Staff calculations.

the NDC roadmap must address.

MALAYSIA
Figure 1. Exposure and Contribution to Climate Change

Low-Elevation Coastal Zone Population, 2000 Damage from Climate-related Events, 2010-19
(Percentage of global LECZ population) (In percent of GDP)
Sources: Dabla-Norris et al. 2021, Neumann et al. 2015, EM-DAT 2020, Our World in Data, ClimateWatch, IRENA 2021.

MALAYSIA
Table 1. Submission Status of Intended Nationally Determined Contributions (INDCs) Across ASEAN
Country Commitment Reference case Target year
Brunei 20 percent BAU* (2015) 2035

Cambodia 27 percent 2010** 2030
Indonesia 29 percent reduction, additional 12 percent BAU 2030
Lao PDR Sector measures to reduce emissions
Myanmar Sector based measures to increase renewables and BAU 2030
energy-based efficiency
Malaysia 45 percent reduction in emissions intensity BAU (2005) 2030

Philippines 75 percent reduction BAU 2030
Singapore 36 percent reduction in emissions intensity BAU (2005) 2030
Thailand 20 percent, additional 5 percent BAU (2005) 2030
Vietnam 8 percent and additional 17 percent conditional on BAU (2010) 2030
access to international cooperation and mechanisms
* Business as usual (BAU) implies a reduction in emissions relative to the hypothetical emissions projected forward
from a base year in the absence of major climate change policies. Not all countries provide a derivation for the BAU
pathway; the base year is given in parentheses where available.
**Country that is not using a BAU scenario as reference for emission reductions.
Source: United Nations Framework Convention on Climate Change (UNFCCC) INDC submissions.
5. Fiscal policy can play a key role in climate mitigation, including by implementing
carbon pricing policies that raise the price of carbon and incentivize firms and households to
reduce their emissions. This paper focuses on two key market-based potential carbon pricing fiscal
tools for Malaysia: carbon tax and ETS, which have both been put forward in the 12MP as policy
options to reduce emissions. The October 2019 IMF Fiscal Monitor argues that, of the various
mitigation strategies, carbon taxes on the supply of fossil fuels in proportion to their carbon content
are “the most powerful and efficient, because they allow firms and households to find the lowest-
cost ways of reducing energy use and shifting toward cleaner alternatives.” Under an ETS instead,
firms are required to hold an allowance for each ton of their emissions, the government sets a cap
on total allowances or emissions, and market trading of allowances establishes the emissions price.
The total quantity of allowances is fixed, and market trading of allowances establishes a market price
for emissions. Auctioning the allowances provides a source of government revenue. Overall, a
carbon tax’s revenue generation capacity, its price predictability under a clear pricing path, and its
low administrative burden (a carbon tax can build on existing tax systems) separate it from an ETS
that usually offers no price predictability, generate less revenues and require new infrastructure and
new capacity to monitor trading markets. 3 In the case of Malaysia with revenue weakness and
development spending needs under the 12MP, a climate tool that could both address emissions
3
In the absence of exemptions, with the addition of a price floor, and if the government auctions initial allowances,
an ETS can achieve the same beneficial outcomes as an equivalent carbon tax. In practice however that has not been
the case as the coverage of ETS has usually been limited to power generators and large industrial firms.

MALAYSIA
reductions and generate needed fiscal revenues appears superior. Carbon taxation could also be
complemented by additional sector-specific measures, such as energy efficiency regulations or
feebates. A comprehensive mitigation strategy may also include direct public provision of some
green infrastructure not provided by the private sector.
6. Despite being very effective, carbon taxes have seldom been the instrument of choice
in the Asia-Pacific where countries have instead adopted or are considering adopting ETSs to
mitigate climate change. China, Korea and New Zealand have opted to implement an ETS, while
several other countries, including Malaysia, are considering doing so. Only Japan and Singapore
have implemented a carbon tax in the region, and Indonesia is scheduled to do so in 2022 (Table 2).
While ETSs appear to be more widely used in the region, the prospective imposition of border
carbon adjustments (BCAs), which are import fees imposed by carbon-taxing countries on goods
manufactured in non-carbon taxing countries, by the European Union and potentially other major
advanced economies makes the case for countries in the region to adopt their own carbon tax. For
Malaysia, the 2022 Budget raised concerns about the effect of BCAs on Malaysian exports given
strong trade links with the US and EU, and highlighted the need for policies that would enable the
smooth transition of industries to low carbon activities.
Table 2. Carbon Tax and Emissions Trading Systems in Asia and the Pacific
Country Initiative Type Status Coverage Year of implementation
China China national ETS ETS Implemented National 2021
Beijing pilot ETS ETS Implemented Subnational 2013
Chongqing pilot ETS ETS Implemented Subnational 2014
Fujian pilot ETS ETS Implemented Subnational 2016
Guangdong pilot ETS ETS Implemented Subnational 2013
Hubei pilot ETS ETS Implemented Subnational 2014
Shanghai pilot ETS ETS Implemented Subnational 2013
Shenyang ETS ETS Under consideration Subnational TBC
Shenzhen pilot ETS ETS Implemented Subnational 2013
Tianjin pilot ETS ETS Implemented Subnational 2013
Indonesia Indonesia carbon tax Carbon tax Scheduled National 2022
Indonesia ETS ETS Under consideration National TBC
Japan Japan carbon pricing mechanismETS Under consideration National TBC
Japan carbon tax Carbon tax Implemented National 2012
Saitama ETS ETS Implemented Subnational 2011
Tokyo CaT ETS Implemented Subnational 2010
Korea Korea ETS ETS Implemented National 2015
Malaysia Malaysia ETS ETS Under consideration National TBC
New Zealand New Zealand ETS ETS Implemented National 2008
Singapore Singapore carbon tax Carbon tax Implemented National 2019
Thailand Thailand ETS ETS Under consideration National TBC
Vietnam Vietnam ETS ETS Under consideration National TBC
Sources: World Bank Carbon Pricing Dashboard, April 2021; IMF (2021b).
7. The analysis in this section relies on the IMF/World Bank Carbon Pricing Assessment
Tool (CPAT) which allows a detailed quantitative analysis of carbon pricing mechanisms.4
CPAT provides data on use of fossil fuels by major sectors and produces country-specific projections
of fuel use and CO2 emissions in a business-as-usual (BAU) baseline. It allows rapid estimation of
4
Please see IMF (2019b) for more details on the CPAT.

MALAYSIA
the likely impact on emissions, fiscal revenues, local GHG Emissions Intensity: Baseline vs. Paris Pledge NDC
(mtCO2e per unit of GDP in constant LCU)
air pollution, mortality, and economic welfare of 350
carbon pricing, and can thus help policy makers 300
design, compare and implement such carbon 250
pricing reforms to achieve their climate mitigation 200
NDCs. The impacts of carbon pricing on fuel use 150
and emissions depend on: (i) their proportionate 100

Total including LULUCF
Total excluding LULUCF
impact on future fuel prices in different sectors; (ii) 50 NDC Target GHG Emissions including LULUCF
NDC Target GHG Emissions excluding LULUCF
a simplified model of fuel switching and electricity 0
2018 2020 2022 2024 2026 2028 2030 2032 2034
dispatch within the power generation sector; and Sources: IMF staff calculations.
(iii) various own-price elasticities for electricity use

and fuel use in other sectors.
8. Malaysia is projected to overachieve on its updated commitment of 45 percent

unconditional reduction in emission intensity under the Paris Agreement in the BAU baseline.
The expected overachievement includes emissions from land use and the land-use change and
forestry (LULUCF). Based on emission intensity in Malaysia in 2005 (the base year), the unconditional
target is calculated and compared to projected emission intensity in 2030. For Malaysia, emission
intensity in 2030 is projected to be 39 percent lower than the target. This issue is not Malaysia-
specific, in the Asia-Pacific region, IMF (2021a) identified several other countries in the same
situation such as India, Hong Kong, Nepal and Myanmar. This result speaks more about the
ambitiousness of the target rather than the need for emission reductions, which remains important
including to achieve net zero emissions by 2050. Next, we assess how different carbon tax rates and
how the ETS allows significant reduction in baseline emission intensity, while securing additional
benefits.
9. Illustrative simulation exercises with different carbon pricing policies show a carbon
tax can achieve reduction in emissions relative GHG Emissions: Towards Net Zero Emissions (NZE) Pathway
to the BAU baseline. A carbon tax of US$25, (in mtco2e)
400
US$50, and US$75 per ton of CO2 emissions can 350
reduce emissions in Malaysia 8, 12 and 15 percent 300
below IMF-projected BAU levels in 2030. However, 250
a carbon tax larger than US$75 would be needed 200
150
to achieve carbon neutrality by 2050, a goal that
100
has been reiterated in the 12MP. Overall, carbon 50
Baseline $75 Carbon tax NZE
pricing would optimally envision a rising and 0

2018 2020 2022 2024 2026 2028 2030 2032 2034
predictable price per ton of emissions, and would Sources: IMF staff calculations.
also be comprehensive enough in coverage,

avoiding exemptions from the start.

MALAYSIA
10. ETS can also achieve emissions reductions but at a lower rate compared to carbon
taxation. We compare the ETS to a carbon tax using
CO2 Reduction from ETS as Main Mitigation Instrument
the same CO2 prices per tons in 2030 to see how (Fraction of CO2 reductions from a carbon tax at $70 per ton)
Brunei Darussalam 0.31
different they are in terms of the mitigations New Zealand

Nepal
0.43
0.49
Myanmar 0.57
responses they promote. As argued in IMF (2019b), Thailand

Bangladesh
0.58
0.59
ETSs are typically around 40-70 percent as effective

Japan 0.67
Sri Lanka 0.71
Korea 0.71
as broad carbon pricing, not because of the

Cambodia 0.71
Indonesia 0.72
China 0.79
instrument itself but rather its assumed coverage of

Malaysia 0.79
Australia 0.83
Singapore 0.84
power generators and large industries only bases on Vietnam

Philippines
0.85
0.85
Mongolia 0.85
applications of ETS. In the Asia-Pacific region, the India

Hong Kong SAR
0.87
0.93
effectiveness of ETS for a US$70 per ton CO2 price is 0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1
Sources: IMF (2021) and IMF staff calculations.

close to 70 percent on average (IMF 2021a), and for
Malaysia specifically 79 percent. This means that the
ETS can achieve 79 percent of the CO2 reduction attained from a carbon tax at US$70 per ton.5
11. Carbon taxation could potentially raise significant fiscal revenues, which could be
recycled to address the distributional effect of resulting higher energy prices, and to support
adaptation efforts. US$25, US$50, and US$75 carbon prices could potentially raise fiscal revenues
of 1, 2, and 3 percent of GDP respectively in 2030. But carbon taxation raises energy prices
significantly, with potentially regressive consequences since energy products often account for a
higher share of the consumption
Energy Price Changes for $75/tCO2 in 2030
basket of low-income households. Energy price changes (weighted by consumption)
for $75/tCO2 in 2030 (weighted by consumption)
A US$75 carbon price raises coal Fuel Unit Baseline Carbon tax % change
and natural gas prices by 111 and Coal US$ per gigajoule (GJ) 6.78 14.35 111%
Natural gas US$ per gigajoule (GJ) 7.83 13.66 75%
75 percent respectively above the Diesel US$ per liter 0.62 1.02 65%
BAU baseline levels in 2030. Diesel Oil
Electricity
US$ per barrel
US$ per kwh
69.57
0.10
107.22
0.15
54%
39%
and oil prices also rise significantly Kerosene US$ per liter 0.70 0.91 31%
LPG US$ per liter 0.53 0.68 28%
by 65 and 54 percent respectively. Gasoline US$ per liter 0.70 0.89 27%
It is therefore imperative that these
additional revenues are wisely and efficiently used. There is a strong case to use such revenues for
transfers that would compensate firms and low-income households affected by higher energy
prices.6 In the case of Malaysia, using a fraction of those revenues to fund public investments in the
context of the envisaged scaling up of development expenditure under the 12MP would be an
obvious choice. These investments could also include adaptation measures, as discussed below, to
reduce the financing gap for worthwhile long-term measures that increase resilience to climate risks.
While a holistic approach is required, considering all potential development needs and the marginal
5
Other potential mitigation measures such as coal tax and electricity emissions tax are less effective in reducing
emissions in Malaysia, with fraction of CO2 reduction from a $70 carbon tax at 70 and 58 percent respectively.
6
Given Malaysia’s large informal sector, targeted cash transfers are preferable to reductions in labor taxes, and even
these would require careful design to ensure all relevant groups are reached, given the imperfect coverage of
existing social safety nets. Ensuring that such compensating transfers reach those most affected by higher prices may
also be important for ensuring public support for any nascent carbon taxation scheme.

MALAYSIA
return to each possible use of carbon tax revenues, compensatory transfers and adaptation
investments would likely score highly.
12. Simulations suggest that recycling fiscal Net effect on GDP Growth from Carbon Tax Revenue recycling
(in percentage points relative to BAU baseline)
revenues on transfers and on public investment 3%
has the potential to raise GDP growth in

100% Transfers
3%
100% Public Investment
Malaysia in the medium term. The negative effect 2%
50% Transfers and 50% Public
from carbon taxation on growth will be more than 2%
Investment
1%
compensated if revenues from carbon taxation are
1%
recycled between transfers and public investment. 0%
Furthermore, investment into green activities could -1%
have a particularly large positive impact on GDP, as -1%

2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035
the associated fiscal multiplier tends to be Sources: IMF staff calculations.
significantly higher (Batini et al., 2021). Net gains

are highest if 100 percent of revenues are recycled towards public investment, and lowest if all are
spent on transfers. Recycling half of revenues on investment and the other half on transfers has the
potential to raise GDP growth by about 1 percentage point higher than the baseline growth in the
medium and long run. Given the initial costs, the imposition of a carbon tax must be carefully timed
to ensure that it does not undermine the post-pandemic recovery.
C. Adaptation
13. Effective adaptation to climate change has preventative, alleviative and financial
elements (IMF 2019). Harm can be prevented through public information (e.g., early warning
systems and risk assessments), new technologies and infrastructure, and policies to discourage
inefficient risk-taking. Should potentially harmful events occur, damage can be alleviated through
well-prepared contingency plans which provide timely support and reconstruction, and through
social safety nets which minimize harm to the most vulnerable firms and households. Adaptation
investment can be very costly (Figure 2) but is critical in limiting post-disaster debt increases by
improving resilience ex-ante (Marto et al., 2018). The financial sector has a vital role in funding such
preventative investment, providing post-disaster liquidity, and managing other physical, transition
and liability risks of climate change (Carney 2015).
14. Malaysia has made significant progress in preparing to adapt to climate change.
Recent events have highlighted the urgency of such adaptation: major floods occurred
in 2010, 2012, 2014 and 2021, while a particularly strong El Niño in 2016 led to water shortages,
heatwaves and wildfires. Minimum, mean and maximum air temperatures have increased, along with
rainfall intensity. The 2018 Third National Communication to the UNFCCC assesses the vulnerability
of six sectors – water and coastal resources, food security and agriculture, forestry and biodiversity,
infrastructure, energy and public health – to four major risks, namely flooding, dry spells, higher sea
levels, and higher sea temperatures. It also identifies key gaps and outlines plans for improvement
(Table 2). The 11th Malaysia Plan made significant progress, with new flood mitigation projects
protecting 1.6 million people. The 12th Malaysia Plan goes further, outlining a range of measures to

MALAYSIA
Figure 2. Estimated Costs of Climate Change Adaptation
Source: Dabla-Norris et al. 2021, Nicholls et al. 2019, Rozenberg et al. 2019, Hallegate et al. 2019, IMF Capital
Stock 2019 Dataset, IMF WEO and staff calculations.
Note: All estimates are at the country level. Upgrading cost estimates are constructed using projected investment
spending, the likely exposure of investment projects, and upgrading unit costs. Retrofitting costs are constructed
using capital stock estimates, estimates of the average exposure of physical assets, and retrofitting unit costs.
Coastal protection estimates were obtained with the methodology of Rozenberg et al., 2019, and the level of
protection corresponds to the protection that minimizes the sum of protection costs and residual flood damage
to assets.
promote green and resilient cities, to assess and publicize hydro-climatic hazards for planning
purposes, and to improve early warning systems and disaster response and recovery measures. The
next step is to develop an integrated national approach. As such, the creation of a Policy on Disaster
Risk Management is among the eight priority KPIs attached to one of the Plan’s three core themes,
‘Advancing Sustainability’. The Ministry of Environment and Water is developing a comprehensive
National Adaptation Action Plan to identify the most important potential investments in increasing
resilience and has applied to the UN Green Climate Fund for financial support with this process.
15. Nonetheless, there remains substantial further work to be done. Malaysia scores
relatively highly on ‘adaptive capacity’ (Figure 3), defined as ‘the ability of a system to adjust to
climate change (including climate variability and extremes) to moderate potential damages, to take
advantage of opportunities or to cope with the consequences’ (IPCC Fourth Assessment
Report, 2007). Yet projected adaptation costs remain high, necessitating careful management over
the medium term. Substantial further work remains to assess the cost-effectiveness of potential
measures, including measures to address risks emerging from studies such as those in Table 2.
Revenues from mitigation measures, such as a carbon tax as outlined above, could be recycled to
targeted investments in adaptation that also create jobs and support growth. To date, progress
towards a full National Adaptation Plan has been slower than in some neighbors (Figure 4),
underscoring the need for fiscal reform and coordinated efforts across government and private
sector partners to ensure adequate financing for adaptation-related investments.

MALAYSIA
Table 2. Extract from the Third National Communication to the UNFCCC: Adaptation
Gaps and Improvement Plans
Area Gaps Improvement Plan

Lack of projected flood maps covering all Establish comprehensive flood maps covering all
Flood
the flood prone basins. flood prone basins in Malaysia.
Analysis of projected dry spells for Develop seasonal projected dry spell maps that are
vulnerability assessments need to be based suitable for vulnerability assessments at the sub-
on seasonal rather than annual scale, and basin and local scales.
Dry Spell
with high spatial resolution.
Insufficient priority and detailed analysis of Conduct studies on the impact of climate change
impacts of dry spell on dams and reservoirs on dams for electricity generation and water supply.
Insufficient coastal hydrodynamic Develop high resolution coastal inundation maps
simulation that incorporates sea level rise based on coastal hydrodynamic simulation that
impacts for vulnerable coastal regions in incorporates sea level rise for 20-year time intervals
Sea Level Rise
Malaysia. up to 2100, and carry out detailed coastal erosion
and sedimentation studies to plan comprehensive
adaptation measures.
The combined impacts of sea level rise, Develop models that integrate sea level rise, storm
storm surges, abnormally high tides and surges, abnormally high tides and high rainfall for
Integrated high rainfall which could lead to severe early warning and assessment of future scenarios.
hazards flooding are not well understood.
Inadequate information of assets in Develop a comprehensive database for each sector
vulnerable areas for each sector.
Insufficient capacity to conduct impact Develop the required capacity in each key sector for
assessments in all key sectors Vulnerability & Adaptation analysis.
Capacity Building Lack of awareness and understanding of i. Conduct detailed studies on the full chain impacts
and Awareness the full chain of implications of climate of climate change for all sectors;
change impacts by key stakeholders in all ii. Conduct awareness and capacity building
relevant sectors. programs to targeted stakeholders.
Source: Malaysia Third National Communication to the UNFCCC, Chapter 4.
Figure 3. Adaptive Capacity and Physical Exposure
Sources: Dabla-Norris et al., 2021, based on 2015–18 data from the EU commission, the United Nations University Institute
for Environment and Human Security, the University of Notre Dame, and the IMF World Economic Outlook database.

MALAYSIA
D. Finance
16. While the financial sector is itself exposed to risks from climate change, it also has an
important role in supporting the sustainability transition. In 2019 approximately 12 percent of
all assets held by financial players in Malaysia were in sectors exposed to climate change
(BNM, 2021). Green debt issuance, alongside other environmental, social and governance (ESG)
products, has expanded rapidly in Malaysia in recent years (Figure 5). Malaysia is a leader in Islamic
green finance, including issuing the world’s first sovereign dollar sustainability sukuk, in a US$800
million offering in April 2021, providing new sources of financing for eligible environmental projects.
17. Significant initiatives are underway to prepare the Malaysian financial sector for risks
arising from climate change. The transition to a greener financial system is a substantial element
of Bank Negara Malaysia’s 2022-2026 Financial Sector Blueprint.7 BNM is working across five broad
areas: (i) integrating climate risk within macroeconomic and financial stability assessments; (ii)
strengthening regulatory and supervisory expectations for managing climate risks; (iii) creating an
enabling environment for green financing and investment; (iv) greening its own operations; and (v)
engagement and capacity building across government and the financial sector. BNM plans to
include climate risks in financial sector stress tests by 2024, to which end in late 2021 it released an
Exposure Draft setting out proposed principles for climate risk management by financial institutions,
and will publish a discussion paper on potential stress test methodology in 2022 Q1 to solicit
industry feedback. To support its supervisory role, BNM has issued a taxonomy for classifying
economic activities as ‘climate supporting’, ‘transitioning’ or ‘watchlist’, for use in future risk
assessments and to facilitate standardized design of green financial products.8 This is -
complemented by new guidance on assessing climate risk for Islamic financial institutions, including
through a series of sectoral guides which enumerate specific upcoming environmental, social and
governance risks.9 In 2022 BNM plans to publish a guide for financial institutions to facilitate
voluntary disclosure of climate-related risks in line with the G20’s Task Force on Climate-Related
Financial Disclosures (TCFD), with a view to these being mandatory by 2024.10 Internally, BNM has
introduced Environmental, Social and Governance (ESG) and Socially Responsible Investing (SRI)
criteria into its investment processes, and taken a range of measures to reduce the carbon footprint
of its own operations, such as more durable banknotes with a longer lifespan and improved energy
efficiency in Bank buildings.
7
https://www.bnm.gov.my/publications/fsb3. This parallels the Ministry of Energy, Green Technology and Water’s
Green Technology Master Plan and the Security Commission’s Sustainable and Responsible Investment Roadmap.
8
https://www.bnm.gov.my/-/climate-change-principle-based-taxonomy
9
https://www.bnm.gov.my/-/value-based-intermediation-financing-and-investment-impact-assessment-framework-
guidance-document. Specific guides have so far been published for the palm oil, renewable energy, and energy
efficiency sectors, while guides on the oil and gas, construction and infrastructure, and manufacturing sectors are
being finalized.
10
In partnership with the UN Capital Development Fund and the Malaysia Digital Economy Corporation, BNM also
sponsors accelerator programs for start-ups with novel contributions to achieving the SDGs.
https://www.bnm.gov.my/-/launch-of-the-digital-finance-innovation-hub-and-inclusive-fintech-accelerator

MALAYSIA
18. A range of forums have been established to support financial sector collaboration,
both domestically and internationally. The Joint Committee on Climate Change (JC3), established
in 2019, brings together the BNM, the Securities Commission, Bursa Malaysia, and 19 industry
players. More broadly, the Malaysia Climate Action Council, chaired by the Prime Minister,
coordinates national climate change action by relevant agencies and state governments.
Internationally, the ASEAN Taxonomy Board, set up in 2021, includes representatives from all 10
ASEAN member states, while BNM liaises with more than 80 countries through the Network of
Central Banks and Supervisors for Greening the Financial System (NGFS), which it joined in 2018.
19. Looking ahead, a challenge across these areas is to transition smoothly from
institution-building and agreement of principles to introducing binding regulation and taking
concrete actions. In doing so, the speed of implementation must be carefully judged to ensure
effective execution with sufficient buy-in from industry counterparts. Meanwhile, financial authorities
should continue to engage with global ‘frontrunners’, including through the NGFS, to examine
innovative policy measures from other countries and to assess the potential to apply them in
Malaysia. While relatively advanced compared to emerging market peers, financial sector measures
could build on approaches being developed by, for instance, the ECB and Bank of Japan, such as
using disclosure of climate-risk exposure as the basis for favorable treatment for collateral and asset
purchases, or developing minimum standards for climate risk assessment methodologies.
E. Conclusion
20. While recent policy proposals are welcome, particularly the focus on sustainability in
the 12MP, an acceleration of mitigation and adaptation measures will be required. Though less
vulnerable than many neighbors, Malaysia remains exposed to significant potential harms from
climate change. The target of net zero GHG emissions by 2050 will require substantial structural
reform and green investment, as noted in the 12MP. Carbon taxation is a promising option for
incentivizing the energy transition, alongside a range of sector-specific reinforcing measures.
Carefully calibrating these actions and any compensatory transfers will be critical to ensure that they
are not regressive, particularly in the context of Malaysia’s large informal sector. Substantial
expenditures on adaptation will also be required, with an urgency underlined by recent floods and
heatwaves. Financial authorities have taken early steps to assess exposure to physical, liability and
transition risks, and the successful recent issuance of the government’s first sustainability sukuk is
welcome, but substantial work remains. Finally, there is scope for mitigation and adaptation to be
integrated, for instance by hypothecating some share of revenues from a potential carbon tax for
adaptation-related spending.
21. In the short term, COVID-related recovery spending should be aligned with
environmental goals. Support to firms and industries should not be provided through weakening
environmental regulations. Indeed, firm-specific support can be made contingent on compliance
with environmental standards and disclosure of exposure to climate-related risks. Stimulus spending
should include support for green investment. There are many opportunities for green investments
with large fiscal multipliers, as highlighted by Hepburn et al. (2020; see Figure 6) and Batini et al.

MALAYSIA
(2021), and nature-related jobs such as ecosystem restoration can provide new sources of
employment. By highlighting sustainability as a key theme, alongside resetting the economy, the
Twelfth Malaysia Plan is promising in this regard.
Figure 4. Progress Toward NAPs in Asia and the Pacific
Sources: Dabla-Norris et al. 2021, using Summary on Progress on NAPs (https://unfccc.int/topics/adaptation-and-

resilience/workstreams/national-adaptation-plans) and UNFCCC (2019).
Note: The figure is created from the UNFCCC table of progress on national adaptation plans (NAPs) as follows. The
technical guidelines by the United Nations consists of four elements: (1) laying the groundwork and addressing
gaps; (2) strategic orientation and preparation; (3) implementation strategies; and (4) reporting, monitoring, and
review. The number of steps taken in the NAP process represents the number of the elements a country has
completed (if at least one measure in each element is taken, the country is deemed to complete that element).
Four countries (Malaysia, Marshall Islands, Micronesia, and Palau) were not in the UNFCC database, but considered
to have taken one step because documents were found that showed progress had been made in creating an
adaptation plan. For advanced economies, independent research verified the status of their respective NAPs.
Figure 5. Issuance of Sustainable Debt in Malaysia

MALAYSIA
Figure 6. Potential Climate Impact and Fiscal Multiplier of COVID-19 Stimulus Policies
Source: Hepburn et al. 2020.

Notes: Graph plots the estimated long-run fiscal multiplier and potential climate impact of 25 archetypical
fiscal stimulus measures, based on surveys of officials in G20 finance ministries and central banks.

MALAYSIA
References
Batini, N., Di Serio, M., Fragetta, M., Melina, G., Waldron, A. (2021). "Building Back Better: How Big
Are Green Spending Multipliers?” IMF Working Paper 21/87. Washington, DC: International
Monetary Fund.
BNM (2021). “Preparing Our Financial Sector for Risks from Climate Change”. Bank Negara Malaysia.
Retrieved from https://www.bnm.gov.my/climatechange
Carney, M., (2015). “Breaking the Tragedy of the Horizon – Climate Change and Financial Stability”.
Bank of England. Speech at Lloyd’s of London, 29 September 2015.
Dabla-Norris, E., Daniel, J., Nozaki, M., Alonso, C., Balasundharam, V., Bellon, M., Chen, C., Corvino, D.,
Kilpatrick, J., 2021. “Fiscal Policies to Address Climate Change in Asia and the Pacific”. IMF
Departmental Paper 21/07. Washington, DC: International Monetary Fund.
Dasgupta, S., Laplante, B., Murray, S. and Wheeler, D. (2009). “Sea-level rise and storm surges: A
comparative analysis of impacts in developing countries.” The World Bank.
URL: http://documents1.worldbank.org/curated/en/657521468157195342/pdf/WPS4901.pd
Eckstein, D., Künzel, V., and Schäfer, L. (2021). “Global Climate Risk Index 2021”, Germanwatch,
Berlin. URL: https://germanwatch.org/en/19777
Economic Planning Unit, Prime Minister’s Department, Malaysia (2022), Twelfth Malaysia Plan 2021-
2025 - A prosperous, Inclusive, Sustainable Malaysia. Retrieved from Twelfth Malaysia
Plan, 2021-2025 (epu.gov.my).
Elsayed, I. (2012). “Mitigation of the Urban Heat Island of the City of Kuala Lumpur, Malaysia”.
International Digital Organization for Scientific Information (IDOSI), Middle East Journal of
Scientific Research. 11. 1602–1613. 10.5829/idosi.mejsr.2012.11.11.1590. URL: https://eko-
yol.com/ru/wp-content/uploads/sites/4/2019/03/Kuala-Lumpur-
Mitigation_of_the_Urban_Heat_Island_Inte.pdf
EM-DAT. 2020. “The International Disaster Database”. Center for Research on the Epidemiology of
Disasters. https://www.emdat.be
ESCAP (2021). “Asia-Pacific Disaster Report 2021”. United Nations Economic and Social Commission
for Asian and the Pacific.
Hallegatte, Stephane, Jun Rentschler, and Julie Rozenberg. 2019. “Lifelines: The Resilient
Infrastructure Opportunity”. Washington, DC: World Bank.
Hepburn, C., O’Callaghan, B., Stern, N., Stiglitz, J. and Zenghelis, D. “Will COVID-19 fiscal recovery
packages accelerate or retard progress on climate change?”, Oxford Review of Economic
Policy, 36(S1), 2020.
International Monetary Fund (2019a). “Building Resilience in Developing Countries Vulnerable to
Large Natural Disasters.” IMF Policy Paper, International Monetary Fund, Washington, DC

MALAYSIA
International Monetary Fund (2019b). “Fiscal Policies for Paris Climate Strategies—from Principle to
Practice.” IMF Policy Paper 19/010, International Monetary Fund, Washington, DC.
International Monetary Fund (2019c). “How to Mitigate Climate Change?” Fiscal Monitor.
Washington, DC, October.
International Monetary Fund (2021a). “Fiscal Policies to Address Climate Change in Asia and the
Pacific.” IMF Policy Paper 21/07, International Monetary Fund, Washington, DC.
International Monetary Fund (2021b). “IMF ESG Monitor: July 2021”. International Monetary Fund,
Washington, DC.
IPCC Fourth Assessment Report (2007). “Impacts, Adaptation, and Vulnerability”. Contribution of
Working Group II to the Fourth Assessment Report of the Intergovernmental Panel on
Climate Change. Cambridge: Cambridge University Press.
IRENA. (2021). Renewable Capacity Statistics 2021. Retrieved from International Renewable Energy
Association: https://www.irena.org/publications/2021/March/RenewableCapacity-Statistics-
2021
Marto, R., C. Papageorgiou, and V. Klyuev. 2018. “Building Resilience to Natural Disasters: An
Application to Small Developing States,” Journal of Development Economics. 135: 574-586.
Neumann, Barbara, Athanasios T. Vafeidis, Juliane Zimmermann, and Robert J. Nicholls. 2015.
“Future Coastal Population Growth and Exposure to Sea-Level Rise and Coastal Flooding- A
Global Assessment”. PLoS ONE 10 (6): e0131375
Nicholls, R., Hinkel, J., Lincke, D. and van der Pol., T., 2019. “Global Investment Costs for Coastal
Defense through the 21st Century”. World Bank Policy Research Working Paper 8745, World
Bank, Washington, DC
Ritchie, H., and Roser, M. (2020) - "CO₂ and Greenhouse Gas Emissions". Published online at
OurWorldInData.org. URL: https://ourworldindata.org/co2-and-other-greenhouse-gas-
emissions
Rozenberg, J., and Fay, M., 2019. “Beyond the Gap: How Countries Can Afford the Infrastructure They
Need while Protecting the Planet”. Washington, DC: World Bank.
WBG Climate Change Knowledge Portal (CCKP) (2021). Malaysia. Agriculture Interactive Climate
Indicator Dashboard.
URL: https://climatedata.worldbank.org/CRMePortal/web/agriculture/crops-and-land-
management?country=MYS&period=2080-2099
World Health Organization (2015). “Climate and Health Country Profile – 2015, Malaysia”.
URL: http://www.who.int/globalchange/resources/PHE-country-profile-Malaysia.pdf?ua=1
WTTC (2021). “Malaysia: 2021 Annual Research: Key Highlights”. World Travel and Tourism Council.
URL: https://wttc.org/ Research/Economic-Impact

MALAYSIA
Appendix IX. Capital Flows Volatility and Spillovers in Malaysia1

Potential inward spillovers to Malaysian financial markets from changes in global risk appetite and
investor preferences could be significant. Monetary policy normalization in advanced economies may
affect Malaysia via higher borrowing costs and more volatile capital flows and FX markets. This
appendix discusses recent trends in the structure and volatility of capital flows to Malaysia. It also
explores factors that could amplify and mitigate shock transmissions, including reforms introduced by
the BNM aimed at improving Malaysia’s resilience to external shocks.
A. Capital Flows Volatility in Malaysia
1. Foreign capital became an important source of funding for Malaysia (Figure 1). Over
the last two decades, foreign direct investment (FDI) in Malaysia stood just above 3 percent of GDP
per annum, the highest among regional peers. Non-resident portfolio investments (PI) added about
1.6 percent of GDP on average, with over a third of that inflow going into public debt. Other
investment account balance, which was mainly driven by non-resident deposits in domestic banks
and interbank funding, stood at about 0.6 percent of GDP per annum on average in 2002-2021.
Figure 1. Non-Resident Net Inflows

(rolling four-quarter sum, in percent of rolling four-quarter GDP)
Sources: Haver Analytics, IMF staff calculations.
2. Like other Asian emerging economies, Malaysia faced high volatility of capital inflows.
Compared to regional peers, Malaysia has high volatilities of portfolio flows and other investment
(Figure 2). The latter was driven by non-resident deposits and interbank lending, with banks’ external
liabilities reflecting Malaysia’s integration into the regional financial system.2 After the GFC, in
addition to advantageous growth prospects and a gradual liberalization of its capital account, ample
1
Prepared by Kodjovi Eklou, Natalia Novikova and Tian Yong Woon.
2
Malaysia’s bank external liabilities are higher than those observed among regional peers. This reflects significant
presence of foreign banks, including those operating in the Labuan International Financial Centre (LIBFC), and sizable
regional operations by domestic banks (BNM 2018). External funding acquired by foreign banks normally reflects
intragroup placements from parent banks for back-to-back transactions. For domestic banking groups, changes in
external liabilities are related to centralized liquidity management, including pooling of excess liquidity from overseas
branches.

MALAYSIA
global liquidity became an important capital flows driver for Malaysia too (BIS 2020). Enhanced
financial integration made the country more exposed to the global risk-on/risk-off waves and, as
discussed in the following sections, has important implications for the government bond market.
Figure 2. Malaysia vs Regional Peers: Capital Inflows and Volatility
(Q1 2002 - Q3 2021, bars – capital inflows (LHS), crosses - volatility (RHS))

Note: Capital inflows (bars) = Period averages of quarterly inflows in percent of quarterly GDP. Volatility
readings (crosses) = Period sample standard deviations of quarterly capital inflows in percent of quarterly GDP.
3. More recently, the magnitude and length of Malaysia’s total capital flow cycle have
moderated. The two most volatile components of Malaysia’s capital account — PI debt inflows and
non-resident deposits — often offset each other outside of crisis episodes. At the same time, the
volatility of deposit flows continues to increase steeply (Figure 3). Capital outflows by residents have
also increased, partly due to Malaysia’s efforts to liberalize its capital accounts and allow investment
abroad.
4. Meanwhile, capital outflows by residents also increased, partly due to efforts to
liberalize capital accounts and allow investment abroad. Domestic investment abroad (DIA)
averaged 3.4 percent of GDP, followed by residents’ portfolio investments (PI) abroad, which
averaged about 1.8 percent of GDP (Figure 4). The latter has proven to be relatively stable. Between
end-2018 and Q3 2021, cumulative portfolio investment by residents stood at US$33 billion,
reflecting investments by domestic institutional investors in equities primarily, and debt securities,
exceeding corresponding foreign inflows.
Figure 3. Volatility of Non-Resident Inflows Figure 4. Capital Flows by Residency
(in percent of GDP, 8-quarter rolling) (Q1 2002 – Q3 2021, average quarterly flows)

Notes: On Figure 3, volatility readings are rolling 8-quarter sample standard deviations of net capital inflow components
in percent of GDP. On Figure 4, blue circles -non-resident net inflows, red triangles -resident net outflows. Banks = Deposit
Corporations.

MALAYSIA
B. Spillovers from Policy Normalization in Advanced Economies
5. After a decade of loose monetary policy and quantitative easing, advanced economies
(AE) have initiated policy normalization. This can affect EM capital flows and financial conditions
via several channels.
• Higher level of rates globally due to tapering of asset purchases and interest rate hikes by AEs’
central banks. Tighter global liquidity may translate to higher borrowing costs for EM issuers.
Historically, this impact is especially significant when policy tightening was unexpected or not
driven by better economic conditions (IMF 2021b). US monetary policy tightening driven by
strong economic performance however, may be associated with capital inflows to EMs and lower
risk premiums on EM dollar-denominated bonds, while leading to higher yields on EM domestic
debt. The reason could be that both a positive trade channel effect (higher external demand for
EMs) and a positive risk channel effect (greater global risk appetite) lead to expectations of
higher monetary policy rates.
• Appreciation of the US dollar. Dollar appreciation would have implications for EM balance sheets3
with a high share of foreign currency debt or a high reliance on external financing. Financial
channels have become especially important during stress episodes and generally operate in the
opposite direction to the competitiveness channel, as outflows are associated with revaluations
of foreign currency-denominated assets and liabilities. In economies with net short foreign
currency positions, the negative wealth effect tends to lead to credit contractions. Exchange rate
depreciation may be contractionary if sovereign yields rise when the local currency depreciates
even if there is no foreign currency debt. In addition, to the financial channel, exchange rate
movements can also affect EMs through the trade and inflation channels.4
• Capital flow and exchange rate volatility. Higher uncertainty may amplify the impact of financial
shocks (e.g., foreign interest rate shock or capital flow shock) via banks’ balance sheet effects
due to frictions associated with foreign currency denominated liabilities.5 Finally, through the
“risk channel,” surprise monetary policy changes in advanced economies, including those due to
miscommunication, can affect perceptions of risk and by extension, financial conditions in
emerging markets. US monetary policy can change the objective riskiness of EM assets (for
example, by increasing perceived default probabilities) or affect investors’ risk aversion.
6. Negative spillovers are likely to be more pronounced for countries perceived to be

riskier or exhibiting vulnerabilities. Countries with a higher perceived sovereign risk, for example
(speculative sovereign debt credit rating, higher proportion of debt held externally or with higher
3
Evidence shows that 100-basis-point tightening of US monetary policy leads to an immediate 1 percentage point
depreciation of EM currencies vis-à-vis the US dollar and portfolio outflows from EM of 7 basis points of annual GDP
(IMF 2021a).
4
Most central banks in emerging Asia surveyed by the BIS highlight that the financial channel has strengthened over
recent years and during periods of volatility as compared to trade competitiveness and pass-through to inflation
channels (BIS 2020).
5
See Appendix VII of the 2020 Malaysia Staff Report.

MALAYSIA
currency volatility) are disproportionately affected. Spillovers are also estimated to be stronger in (i)
the presence of financial frictions, 6 (ii) the context of weak domestic economic conditions and
limited policy space, (iii) the context of weak macroeconomic fundamentals and policy institutions.
7. Malaysia’s general government debt is Figure 5. General Government Debt vs.

projected to remain below 70 percent of GDP over the Emerging Market Peers
(Issuer scores as of February 2022)
medium term. If contingent liabilities are included,
Malaysia’s general government debt7 lies above some of its
similarly rated peers (Figure 5). Fund public debt
sustainability analysis, however, finds federal government
debt, which covers more than 90 percent of general
government debt, to be sustainable including under
macro-fiscal stress tests (Appendix II).
8. Well-developed financial markets and a large

and diversified domestic investor base could help to
mitigate the impact of tighter global financial conditions on capital flows and domestic
interest rates. Malaysia’s scores for financial market and financial institution depth are on par with
the median level in advanced economies (Figure 6). Over 60 percent of sovereign debt is held by a
diverse domestic investor base (Figure 7), including about one third help by social security
institutions. During earlier periods of heightened capital outflows, active buying by domestic
institutional investors has allowed Malaysia to mitigate excessive adjustments in bond yields
(IMF 2018, BIS 2020).
Figure 6. Financial Market and Institutions Depth Figure 7. Debt Ownership by Domestic and Foreign
(score) Investors
(in percent of total, as of Q2 2020)
Source: Garcia Pascual et al (2021).

Note. Figure 6 is Based on the latest available data as of Q3 2021.
6
Firm-level evidence also shows that financial frictions and balance sheets effects matter as more leveraged firms
and firms with a higher FX liability share, experience lower investment and revenues following US monetary policy
tightening (IMF 2021b, Box 2.1).
7
Adjustments applied to general government debt level vary depending on the rating agency.

MALAYSIA
9. Inclusion of Malaysia into global bond market indices and stable credit rating allowed
access to a broader pool of external public financing.8
• The share of foreign holdings of conventional Figure 8. Foreign Shareholding of Government

government debt increased from 8.2 percent in Debt Securities
mid-2005 to about 22 percent during the GFC and (Billions of Ringgit (LHS), percent (RHS))
rebounded post-crisis to a 35 percent high in mid-

2016. It declined to about 23 percent before the
COVID pandemic and reached about 25 percent at
end-2021 (Figure 8). Foreign holdings are
concentrated in conventional MGS, with only about
11 percent of MGII being held by foreign investors
at end-2021.
• Benchmark-driven investors can both stabilize and amplify volatility of foreign capital flows due
to high correlations of global factors and drivers common across EMs. According to the BNM,
the growing role of asset management companies and benchmark-tracking funds led to greater
co-movement in asset prices across the region (BIS 2020). Arslanalp et al (2020) estimated the
share of benchmark-driven investors in Malaysia’s local currency government debt stood on
average at 50 percent of total foreign holdings of public debt (Figure 9). However, such holdings
were seen to be more stable over a few periods of capital outflows, including the Taper Tantrum
in 2013 and US Presidential Elections in late 2016-early 2017.
Figure 9. Local currency government debt holdings by Figure 10. MSBFs: Aggregate Country Holdings as a
benchmark-driven investors Share of Total Foreign Holdings of Government Debt
(in billions of US dollars, green - benchmark-driven flows) (in percent)
Sources: IMF 2020; Garcia Pascual et al (2021) based on Arslanalp and Tsuda (2014 paper, 2020 data set update); Bloomberg
Finance L.P.; and authors’ calculations.
Note: on Figure 9, minimum, maximum, 2018:Q2, and 2020:Q2 reflect multi-sector bond funds (MSBF) holdings (excluding
equities and state-owned enterprise holdings) as a share of the total foreign holdings of government debt in the respective
country across the period 2009:Q4–2020:Q2.
8
Malaysia Government Securities (MGS), conventional bonds, were added to FTSE Russell in 2004 and Barclay’s
Global Aggregate Index in late 2005. Since then, MGS were also included in JPMorgan Emerging Market Bond Index,
and Markit iBoxx Index, among others. Malaysia Government Investment Issues (MGII), Islamic finance instruments,
are included in the Dow Jones Citigroup Sukuk Index, the Barclay’s Global Aggregate, the Asia-Pacific Aggregate
Indexes, and the JPMorgan Government Bond Index (Emerging Markets). (WB 2020)

MALAYSIA
• The share of highly opportunistic investors has declined significantly. In Malaysia, the share of
unconstrained multi sector bond funds (MSBFs), — which are highly concentrated–both in their
positions and their decision-making and tend to exhibit opportunistic behavior more so than
other investment funds, — declined from above 30 percent in mid-2011 to less than 3 percent
in 2020 (Figure 10).
10. Sizable external financing needs of about one third of GDP represent a potential
amplifying factor for Malaysia. About 65 percent of external debt, which has increased compared
to pre-pandemic levels, is denominated in foreign currency (Appendix X). External financing
dependency is sizeable including 24 percent of GDP related to bank liabilities and 16 percent of GDP
related to government debt. While the composition of external debt has shifted more toward
medium and long tenors, about 37 percent of external debt remains short-term at origin.
Figure 11. Maturity Breakdown of Debt Held by Non- Figure 12. FX Reserves Coverage of Short-term External
Residents Debt
(in percent of rolling four-quarter GDP) (in percent of short-term debt)
Figure 13. Foreign Currency Debt Held by Non-Residents Figure 14. Sources of Funding by Sector
(in percent) (in percent of GDP, as of 2020)
Sources: Haver Analytics, IMF, World Economic Outlook October 2021, IMF staff calculations.
Note: In Figure, 2021 estimates are preliminary, In Figure 14, Government debt relates to federal Ringgit-denominated debt,
where external (domestic) sources also include (exclude) non-resident holdings. Corporate external debt relates to private
offshore non-bank debt. Domestic debt relates to total credit to non-financial sector, less corporate external debt. Bank external
debt relates to offshore private banking sector debt. Domestic debt relates to total commercial bank liabilities, less bank external
debt.

MALAYSIA
11. However, risks of capital outflows Figure 15. Ringgit Implied Volatility vs. Regional Currencies
and exchange rate depreciation related to (In percent, 1-month onshore currency option implied volatility)
external vulnerabilities are mitigated by

several factors. First, Malaysia’s robust
macroeconomic fundamentals, including a
well-diversified economy, sustained current
account surpluses and projected recovery, as
well as sound a domestic financial system and
strong policy frameworks make it an attractive
investment target among peers. Second,
sufficient coverage of short-term external
liabilities by foreign exchange reserves, a
flexible exchange rate regime and availability
and wide-spread use of FX hedging should
help the economy to get ready for externally
induced volatility.9
12. Excessive exchange rate volatility during the periods of disorderly market corrections
can be a source of financial stability risk. 10 Over the years, the BNM has developed and refined FX
and capital flow management frameworks aimed at reducing the impact of speculative flows and
deepening the FX market (BNM 2019, Grigorian 2019). BNM’s FX interventions are driven by an
assessment that excessive and volatile FX movements create risks with the exchange rate generally
viewed as the first line of defense and as a shock absorber.
13. The BNM has adopted a comprehensive approach in dealing with exchange rate and
capital flow-related risks, depending on the nature of the shock. For instance, during 2014–15,
when the economy saw large non-resident capital flows and there was a terms-of-trade shock, the
authorities allowed the exchange rate to adjust flexibly as a shock absorber. In contrast, during the
capital flow reversal of late 2016, the authorities reinforced existing rules by requiring attestation for
banks’ non-facilitation of ringgit NDF.11 In Q1 2020, during a period of significant non-resident
portfolio outflows and sharp increases in exchange rate volatility caused by the COVID-19 outbreak,
the ringgit exchange rate depreciated by about 5 percent vis-à-vis the US dollar. The BNM
employed a targeted FX intervention (FXI) to mitigate excessive exchange rate volatility and provide
sufficient FX liquidity, while allowing for continued ringgit flexibility. In addition, the BNM increased
its outright purchases of government securities as part of its open market operations to support
orderly domestic market adjustment amid portfolio outflows and signs of market stress (BNM 2021).
9
The BNM framework requires corporate borrowings to be used for productive purposes and supported by foreign
currency earnings. Further, under the dynamic hedging program, registered non-resident investors can actively
manage FX risk via forward onshore without documentation. Recent hedging instruments developed by the BNM,
including initiatives to deepen the Interest Rate Swap market may help make capital flows more resilient to external
shocks.
10
According to the BIS survey of Asian central banks, volatility of the bilateral exchange rate against the US dollar
perceived to be central to financial stability (BIS 2020).
11
The Fund assessed this measure as a Capital Flow Management (CFM) under the Institutional View (IV) as it limits
capital outflows by not allowing onshore banks to engage in or facilitate offshore activities (IMF 2020, Appendix X).

MALAYSIA
C. Capital Flows-at-Risk
14. The capital flows-at-risk framework could be useful in modeling the distribution of net
non-resident portfolio debt inflows to Malaysia. The analysis builds on the growth-at-risk (GaR)
methodology by Prasad et al (2019) and adopts approach modifications for gross capital inflows by
Goel and Miyajima (2021) and Gelos et al (2019). A quantile regression framework is applied to
model average four-quarter-ahead net non-resident portfolio debt inflows, in percent of GDP
(termed APDI for short) as a function of financial conditions, domestic macro conditions, domestic
financial openness, and global commodity price fluctuations. The quantile regressions are specified
as follows:
𝑞 𝑞 𝑞 𝑞 𝑞 𝑞
𝑦̅𝑡+1:𝑡+4 = 𝑎𝑞 + 𝛽1 𝐹𝐶𝐼𝑡 + 𝛽2 𝐷𝑜𝑚𝑒𝑠𝑡𝑖𝑐 𝑀𝑎𝑐𝑟𝑜𝑡 + 𝛽3 𝐹𝑖𝑛𝑎𝑛𝑐𝑖𝑎𝑙 𝑂𝑝𝑒𝑛𝑛𝑒𝑠𝑠𝑡 + 𝛽4 𝐶𝑜𝑚𝑚𝑜𝑑𝑖𝑡𝑦 𝑅𝑒𝑡𝑢𝑟𝑛𝑡 + 𝜖𝑡
where, for quantile 𝑞, 𝑦̅𝑡+1:𝑡+4 is the APDI reading at time 𝑡, 𝑎𝑞 is the intercept term, 𝛽i is the
𝑞 𝑞
coefficient corresponding to the 𝑖-th factor (for example, 𝛽2 corresponds to 𝐷𝑜𝑚𝑒𝑠𝑡𝑖𝑐 𝑀𝑎𝑐𝑟𝑜), and
𝑞
q
ϵt is the residual term at time 𝑡.
15. A Financial Conditions Index (FCI) was constructed via principal component analysis
using a group of global and domestic variables. 12,13 Global variables pertain to the VIX Index,
which proxies global investor risk appetite, and the 10-year US government bond yield, while
domestic variables pertain to Malaysia's 10-year to 1-year term spread, 1-year interbank spread, 10-
year sovereign spread, 5-year senior sovereign CDS US dollar spread, and the Malaysia ringgit's
returns against the US dollar.
16. Additionally, the quantile regressions incorporated three control variables. Domestic
macro conditions represented by Malaysia’s real year-on-year GDP growth, domestic financial
openness proxied by the Chinn-Ito Index14 for Malaysia, and global commodity price fluctuations
represented by returns of the Bloomberg Commodity Index.
17. Higher FCI levels relate to tighter financial conditions (Figure 16). Underlying variable
movements that lead to higher FCI levels include increased readings for: the VIX Index, Malaysia's 1-
year interbank spread, Malaysia's 10-year sovereign spread, and Malaysia's 5-year senior sovereign
CDS US dollar spread. Additionally, lower readings for the 10-year US government bond yield,
Malaysia's 10-year to 1-year term spread, and the ringgit’s returns against the US dollar lead to
higher FCI levels.
18. The model was used to simulate the distributional APDI response to changes in
financial conditions (Figure 17). The simulation base period was set at Q3 2021. A two-standard
12
Earlier studies showed that foreign flows into Malaysia’s debt market respond to both domestic and foreign
factors. Grigorian (2019) found that significant global push factors include VIX and US treasury bill yields, while
domestic debt, inflation and exchange rate volatility are significant pull factors. Arslanalp et al (2020) showed that
benchmark-driven flows are much more sensitive than aggregated portfolio to risk shocks, measured by VIX or BBB
spread, and interest rate shocks, e.g., long-term US dollar or medium-term euro rates.
13
Multiple model specifications were tested during the study, including but not limited to model specifications
separating the FCI into its global and domestic components, with issues such as severe multicollinearity, among
others, encountered during the process.
14
Annual data on the Chinn-Ito Index were obtained from the index publisher’s website

MALAYSIA
deviation FCI tightening shock, which would have elevated the base period FCI reading beyond
Q1 2020 pandemic highs, was found to have three effects. First, the shock induces a leftward shift to
the simulated APDI distribution relative to the baseline scenario distribution, suggesting a broad
deterioration in overall APDI outcomes given a harsh tightening of financial conditions. Second, the
probability of Malaysia recording APDI outflows increases to about 70 percent, compared to about
32 percent seen under baseline conditions. Third, Malaysia's 5 percent APDI-at-risk would worsen to
an outflow of at least 5.2 percent of GDP, compared to 3.2 percent of GDP under baseline
conditions.
Figure 16. FCI and 4Q Average PI (Debt) Figure 17. Simulated APDI Distributions
(in factor reading (LHS), in percent of GDP (RHS)) (Q3-2021 simulation base period, in percent of GDP)
Sources: Haver Analytics, Bloomberg LLP, IMF staff calculations

Sources: Haver Analytics, Bloomberg LLP, IMF staff calculations
D. Conclusion
19. Malaysia is well prepared to face an increase in global interest rates implied by the
baseline scenario of an orderly and well-telegraphed policy normalization in AEs. However,
carefully calibrating policy responses will be important. The exchange rate should remain the first
line of defense, especially, in the context of monetary policy tightening in AEs driven by better
economic conditions with positive spillovers through the trade channel. The policy response to
unexpected monetary policy tightening in AEs driven by inflation considerations would depend on
whether the exchange rate remains a shock absorber. Under disorderly market conditions, given the
role of the exchange rate remains a shock absorber, the policy response could combine exchange
rate flexibility with liquidity support, including in foreign currency, and monetary policy easing,
striking a balance between supporting growth and managing capital outflows. Conversely, when the
exchange rate becomes a shock amplifier amidst financial frictions and excessive exchange rate
volatility, FXI would be appropriate. Further, in the context of (imminent) crisis, temporary outflow
CFMs as part of a broader policy package could be considered, in line with the Fund’s Institutional
View (IV). BNM’s steps to liberalize foreign exchange policy and to deepen the FX market are
welcome. Consistent with previous Fund advice, existing CFMs should be gradually phased out with
due regard to market conditions.

MALAYSIA
References
Arslanalp, S., Drakopoulos, D., Goel, R., Koepke, R., and Helbling, T. F. (2020). Benchmark-Driven
Investments in Emerging Market Bond Markets: Taking Stock. IMF Working Papers, 2020(192).
Bank for International Settlements (2020). Capital flows, exchange rates and policy frameworks in
emerging Asia. Report by a Working Group established by the Asian Consultative Council of
the BIS. November 2020.
Bank for International Settlements (2021). Changing patterns of capital flows. Committee on the
Global Financial System Papers, No 66.
Bank Negara Malaysia (2019). Capital Account Safeguard Measures in the ASEAN Context. Report by
members of ASEAN Working Committee on Capital Account Liberalization, February 2019.
Bank Negara Malaysia (2021). Economic and Monetary Review 2020.
Garcia Pascual, A., Singh, R., Surti, J. (2021) Investment Funds and Financial Stability: Policy
Considerations. IMF Departmental Paper, 2021 (018).
Gelos, G., Gornicka, L., Koepke, R., Sahay, R., and Sgherri, S. (2019). Capital flows at risk: Taming the
ebbs and flows. Journal of International Economics, 103555.
Goel, R., Miyajima K. (2021). Analyzing Capital Flow Drivers Using the ‘At-Risk’ Framework: South
Africa’s Case. IMF Working Papers, 2021 (253).
Grigorian, D. (2019). Nonresident Capital Flows and Volatility: Evidence from Malaysia’s Local
Currency Bond Market. IMF Working Papers, 2019 (23).
Finder, H., Lopez Murphy, P. (2019). Facing the Tides: Managing Capital Flows in Asia. IMF
Departmental Paper, 2019 (17).
International Monetary Fund (2019). Malaysia: 2019 Article IV Consultation, March 2019. IMF Country
Report 19/71.
International Monetary Fund (2021a). World Economic Outlook, April 2021.
International Monetary Fund (2021b). Regional Economic Outlook for Asia and Pacific, October 2021.
Lu, Y., Yakovlev, D. (2018). Instruments, Investor Base, and Recent Developments in the Malaysian
Government Bond Market. IMF Working Papers, 2018 (95)
Schmittmann, J., Chua H.T. (2020). Offshore Currency Markets: Non-Deliverable Forwards (NDFs) in
Asia, IMF Working Paper 2020 (179)
World Bank (2020). Malaysia’s Domestic Bond Market: A Success Story.

MALAYSIA
Appendix X. External Debt Sustainability Analysis1

Malaysia’s external debt declined in 2021, driven by a reduction in offshore borrowings. External debt
remains manageable, with one-third of debt denominated in local currency, and about half of short-
term external debt in the form of intragroup borrowings among banks and corporations, which have
been generally stable during the pandemic.
1. Malaysia’s external debt has declined in 2021 compared to 2020 but remains higher
than pre-pandemic levels. Malaysia’s external debt- External Debt
to-GDP ratio stands at 67.6 percent of GDP as (In percent of GDP; based on U.S. dollar values)
of 2021Q3, down from 70.7 percent of GDP in end-

2020. This decline in external debt compared to 2020
has been driven by a reduction in offshore
borrowings, namely private sector external debt.
Public sector borrowing has increased by about
0.2 percent of GDP compared to 2020, while non-
resident holdings of local-currency debt securities
have remained stable.
2. The currency profile of external debt is

stable. As of 2021Q3, over one-third of external debt (35 percent of total external debt) is
denominated in ringgit, largely in the form of nonresident holdings of domestic debt securities
(67.8 percent of ringgit-denominated external debt) and in ringgit deposits (16.6 percent) in
domestic banking institutions. As such, these liabilities are not subject to valuation changes arising
from exchange rate fluctuations. The remaining two-thirds of external debt (about 46 percent of
GDP) is denominated in foreign currency (FC). The non-financial corporate sector accounted for over
half of FC-denominated external debt, which is largely subject to prudential and hedging
requirements.2 Another 30.5 percent of FC-denominated external debt is accounted for by interbank
borrowings and FC deposits in the domestic banking system. (Text Table)
3. From a maturity perspective, the share of short-term external debt by original

maturity remained stable over the past years. Short-term debt by original maturity accounted for
37.8 percent of total external debt as of 2021Q3. About 43 percent of the short-term external debt
are in the form of intragroup borrowings among parent banks and multi-national corporates which
are generally stable and remained stable during the pandemic. Meanwhile, another 14.7 percent are
accounted by trade credits, largely backed by export earnings and are self-liquidating.
4. Over the medium term, external debt-to-GDP ratio is projected to return to a steady
downward path, falling to about 55 percent by 2027. This baseline path reflects the net effect of
sustained current account (CA) surpluses (excluding interest payments), a recovery in economic
growth supported by domestic demand, capital inflows, and low external financing rates. The share
1
Prepared by Nour Tawk
2The central bank uses an approval framework to ascertain that corporate external borrowings are utilized for
productive purposes and that they are supported by foreign currency earnings.

MALAYSIA
of short-term debt, by original maturity, is projected to stabilize at about 35 percent of total external
debt by the end of the medium term. Gross external financing needs, which are estimated to have
reached 28 percent of GDP in 2021, are expected to moderate to about 22 percent of GDP by 2027
(Table 1).
5. Sizable external debt would keep Malaysia’s external vulnerabilities elevated, albeit
manageable. Standard stress tests under the external DSA indicate that external debt is most
vulnerable to an exchange rate depreciation. A 30 percent real exchange rate depreciation in 2021
could push external debt over 75 percent of GDP by 2025. Moreover, the materialization of a
persistent historical shock (which now encompasses the COVID-19 shock) could lead to an external
debt level around 73 percent of GDP in the outer years. Other scenarios—such as a deceleration in
real GDP growth and a rise in the interest rate, would lead to moderate increases in external debt.
The impact of these shocks would be mitigated by: (i) the high share of ringgit-denominated
external debt (about 35 percent of total external debt) and (ii) largely stable intercompany loans
(15 percent of external debt) and interbank borrowings (25 percent of external debt, about four-fifth
of which are in the term of intragroup borrowings from related offices abroad).
6. Risks to Malaysia’s external debt sustainability arising from the above vulnerabilities
would be managed via a variety of mitigation measures. As of December 2021, gross official
reserves stood at US$116.9 billion, or about 120 percent of short-term external debt by original
maturity. Gross official reserves are adequate under the IMF reserve adequacy metric (ARA) (about
126 percent of the metric). Exchange rate flexibility, a moderate CA surplus, and the relatively large
share of ringgit-denominated external debt will continue to serve as important shock absorber
against potential external shocks. Furthermore, continued development of local and foreign
currency markets has also helped to shield the economy from external shocks. Moreover, banks'
exposure in the form of interbank borrowings, NR deposits and debt issuances are subject to
prudential requirements on liquidity and funding risk management, while corporations are subject
to an approval framework to ascertain that external borrowings are utilized for productive purposes
and that they are supported by foreign currency earnings.

MALAYSIA
Table 1. Malaysia: Profile of External Debt

(In percent of GDP unless otherwise mentioned; original maturity)

MALAYSIA
Figure 1. Malaysia: External Debt Sustainability: Bound Tests 1/ 2/

(External(Indebt in percent
percent of GDP)of GDP)
Baseline and Historical Scenarios Interest Rate Shock

(in percent)
100 35 100
Gross financing need Baseline: 2.8
90 under baseline 30 90
Scenario: 3.0
80 (right scale)
73 80 2.1
25 Historical:
70 Baseline 70
20 i-rate shock
60 60 56
Historical 15
50 55 50 Baseline 55
10
40 40
30 5 30
20 0 20
2017 2019 2021 2023 2025 2027 2017 2019 2021 2023 2025 2027
Growth Shock Non-Interest Current Account Shock

(in percent per year) (in percent of GDP)
100 100
90 Baseline: 4.7 90 Baseline: 5.0

Scenario: 3.0 Scenario: 4.5
80 80
Historical: 5.4 Historical: 5.3
70 70
Growth shock 61 CA shock
60 60 57
Baseline Baseline
50 55 50 55
40 40
30 30
20 20
2017 2019 2021 2023 2025 2027 2017 2019 2021 2023 2025 2027
Combined Shock 3/ Real Depreciation Shock 4/

100 100
90 90
80 80 30 % 75
Combined depreciation
70 shock 70
59
60 60
Baseline Baseline
50 55 50 55
40 40
30 30
20 20
2017 2019 2021 2023 2025 2027 2017 2019 2021 2023 2025 2027
Sources: International Monetary Fund, Country desk data, and staff estimates.
1/ Shaded areas represent actual data. Individual shocks are permanent one-half standard deviation shocks.
Figures in the boxes represent average projections for the respective variables in the baseline and scenario being
presented. Ten-year historical average for the variable is also shown.
2/ For historical scenarios, the historical averages are calculated over the ten-year period, and the information is
used to project debt dynamics five years ahead.
3/ Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and current account
balance.
4/ One-time real depreciation of 30 percent occurs in 2021.

Table 2. Malaysia: External Debt Sustainability Framework, 2017–2027
(In percent of GDP, unless otherwise indicated)
MALAYSIA
MALAYSIA
STAFF REPORT FOR THE 2022 ARTICLE IV CONSULTATION—
March 7, 2022 INFORMATIONAL ANNEX
Prepared By Asia and Pacific Department
CONTENTS
FUND RELATIONS _______________________________________________________________________ 2
STATISTICAL ISSUES ____________________________________________________________________ 5

MALAYSIA
FUND RELATIONS
(As of January 31, 2022)
Membership Status: Joined March 7, 1958; Article VIII
General Resources Account
SDR Millions Percent of Quota

Quota 3,633.80 100.00
Fund holdings of currency (exchange rate) 2,620.83 72.12
Reserve tranche position 1,013.00 27.88
Lending to the Fund
New Arrangement to Borrow 7.85
SDR Department
SDR Millions Percent of Allocation

Net cumulative allocation 4,828.98 100.00
Holdings 4,307.30 89.20
Exchange Arrangement:
The de jure and de facto exchange rate arrangements are floating.
Malaysia maintains bilateral payments arrangements with 7 countries. The authorities have indicated
that these arrangements do not have restrictive features.
The current foreign exchange administration (FEA) rules include prudential measures to promote
monetary and financial stability while safeguarding the balance of payments position and value of the
ringgit. The 2019 and 2020 Article IV Consultation Reports (IMF Country Reports No. 19/71 and
No 20/57) list exchange rate measures that have been taken between December 2016 and
December 2019.
In April 2021, the BNM announced further liberalization of the FEA policy aimed to improve business
efficiency and provide flexibility for corporates in particular export-oriented industries to better
manage their foreign exchange risk exposure.
The Malaysian authorities view remaining FEA rules as prudential in nature and necessary to ensure
the availability of adequate information on the settlement of payments and receipts as part of the
monitoring mechanism on capital flows. These controls do not contravene Malaysia’s obligations
under Article VIII. Malaysia has accepted the obligations of Article VIII, Sections 2, 3, and 4, and
maintains a system free of restrictions on the making of payments and transfers for current

MALAYSIA
international transactions except for restrictions in place for security reasons notified to the Fund
pursuant to Decision No. 144-(52/51).
Malaysia, in accordance with the UN Security Council resolutions implements the freezing without
delay of funds and other financial resources, including funds derived or generated from property
owned or controlled directly or indirectly by the designated individuals and entities. These measures
are maintained for the reasons of national and international security and have been notified to the
Fund pursuant to the IMF Executive Board Decision No. 144 (52/51). Malaysia also restricts any
dealings or transactions with Israeli/Israel-related entities/individuals as well as in Israeli Shekel;
however, since these restrictions affect the underlying transactions themselves, they are not subject
to Fund jurisdiction under Article VIII, Section 2(b).
Article IV Consultation:
Malaysia is on the standard 12˗month consultation cycle. Staff discussions for the 2022 Article IV
consultation were conducted on a virtual mission during January 24–February 09, 2022.
Financial Sector Assessment Program (FSAP) Participation:
Malaysia conducted its first FSAP in 2012 (IMF Country Report Nos. 13/52, 13/53, and 13/56−13/60).
Technical Assistance:
Fiscal Affairs Department (FAD): A mission on fiscal responsibility law took place in February 2020.
A seminar on treasury management took place in February 2020. A workshop on tax revenue
strategy and Medium-Term Revenue Strategy was held in January 2020. A mission on revenue
mobilization strategy was conducted in January 2020. A joint workshop on tax policy with MOF was
held in July 2016. A mission on expenditure review was conducted in December 2016. A Public
Investment Management Assessment (PIMA) mission took place in May 2017. A seminar on treasury
modernization was held in July 2017.
Legal Department (LEG): Missions were fielded in May and September 2011 to help draft a
Centralized Asset Management Corporations Bill, in the context of a three-year project to assist
Malaysia in implementing an asset forfeiture regime.
Monetary and Capital Markets Department (MCM): A mission on macrofinancial risk analysis and
vulnerability analysis for corporate and financial institutions was conducted in October 2009. A
workshop on monitoring financial risks was held in in May 2010. Technical assistance missions on
stress testing capital markets were conducted in 2013. Technical assistance discussions on further
options to deepen FX markets and on analyzing the role of the exchange rate in Malaysia’s economy
were concluded in March 2021. Technical Assistance on Monetary Policy Modelling in the context of
the operationalization of Integrated Policy Framework (IPF tools) has been ongoing since
December 2021.

MALAYSIA
Statistics Department (STA): Technical assistance and training missions on Government Financial
Statistics (GFS) were conducted in March 2017 and March 2018, respectively, and follow-up GFS
technical assistance missions were conducted in March and December 2019. Follow-up GFS
technical assistance meetings are scheduled to take place between March/April 2022.
Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT):
In November 2014, Malaysia’s AML/CFT regime was subject of an on-site assessment by the Asia
Pacific Group on Money Laundering (APG) under the new methodology of the Financial Action Task
Force (FATF), the global standard setter for AML/CFT. The Mutual Evaluation Report was published
in September 2015. It concluded that overall Malaysia has a broadly robust legal AML/CFT
framework with generally well-developed and implemented policies, but with a moderate level of
effectiveness. The country developed an action plan to address the key deficiencies identified in the
report. In February 2016, the FATF granted full membership to Malaysia based on its commitments
to continue improving its AML/CFT regime. The FATF will continue to monitor the country’s progress
through its enhanced follow-up process. In the Third Enhanced Follow-up Report (October 2018),
Malaysia made progress in addressing the technical compliance deficiencies, but remained under
the FATF’s enhanced follow-up process and will report back on progress made to strengthen its
implementation of AML/CFT measures.
Resident Representative/Advisor: None.

MALAYSIA
STATISTICAL ISSUES
(As of January 2022)
I. Assessment of Data Adequacy for Surveillance
General: Data provision is adequate for surveillance.
National accounts: The Department of Statistics Malaysia (DOSM) publishes annual and quarterly
estimates of GDP, by the production, expenditure, and (annual only) income approaches, at current and
constant 2015 prices, based on the 2008 SNA. The DOSM also disseminates annual estimates for gross
disposable income, saving, and net lending for the economy, as well as supply and use tables.
Price statistics: The monthly CPI and the PPI are available on a timely and comprehensive basis. A quarterly
Services PPI and monthly building cost index are also published. In 2022 the weights of the CPI basket will
be updated using 2019 as a reference year (instead of 2016), based on the results of the latest Household
Income, Expenditure, and Basic Amenities Survey. The PPI weights are currently based on the 2016 Economic
Census. The weights will be updated based on a new Economic Census that will be conducted once the
COVID-19 crisis has abated.
Government finance statistics: Adoption of accrual reporting is necessary to capture a consolidated view
of both assets and liabilities. There is a need to improve the timeliness, detail, and availability of data on
nonfinancial public enterprises (NFPEs), statutory bodies, and state and local governments. Dissemination of
more detailed data on non-listed NFPEs’ assets and liabilities and domestic and foreign financing by type of
debt instrument and holder would be desirable; efforts in this direction will require continued close
collaboration among agencies, including the Ministry of Finance, the Department of Statistics Malaysia
(DOSM), and Bank Negara Malaysia (BNM). There is also a need to disseminate more information on public
private partnerships.
Monetary statistics: The monetary and financial statistics (MFS) are available on a timely and regular basis
and are broadly aligned to the Fund’s data needs. BNM compiles monetary statistics using the standardized
report forms (SRFs) 1SR for central bank and 2SR for other depository corporations for publication in the
International Financial Statistics. There is a need to improve the institutional coverage of the financial
corporations, sectorization of the domestic economy, and classification and valuation of financial
instruments to ensure full adherence to the IMF’s Monetary and Financial Statistics Manual and Compilation
Guide. In addition, due to the growing importance of insurance corporations, pension funds, and other
financial intermediaries in Malaysia, coverage of MFS should be expanded to include these institutions.
Financial Soundness Indicators: The BNM reports the 13 core financial soundness indicators (FSIs) and five
encouraged FSIs for deposit taking institutions on a quarterly basis for posting on the IMF’s FSI website.
Financial Access Survey: BNM reports data on several key series and indicators of the Financial Access
Survey (FAS), including the two indicators (commercial bank branches per 100,000 adults and ATMs per
100,000 adults) adopted by the UN to monitor Target 8.10 of the Sustainable Development Goals (SDGs).
External Sector Statistics: Department of Statistics Malaysia compiles and publishes quarterly balance of
payments and international investment position (IIP) estimates in accordance with the sixth edition of the
Balance of Payments and International Investment Position Manual. The authorities improved reporting the
data with much more detailed items starting in 2018. Large positions in net errors and omissions have
recently been addressed.
II. Data Standards and Quality
Malaysia subscribed to the Special Data Dissemination Standard (SDDS) on No Data ROSC is available.
August 21, 1996, with metadata published on the Data Standards Bulletin
Board (DSBB). Malaysia met SDDS specifications on September 1, 2000.
Malaysia is currently using a timeliness flexibility option for general
government operations. The latest Annual Observation Report for Malaysia
is available on the DSBB.

MALAYSIA
Malaysia: Table of Common Indicators Required for Surveillance

(As of March 1, 2022)
Date of Date Frequency Frequency Frequency of

Latest Received of of Publication6
Observation Data6 Reporting6
Exchange rates 03/1/2022 03/1/2022 D D D
International reserve assets and reserve liabilities

12/2021 01/07/2022 M M M
of the monetary authorities1
Reserve/base money 12/2021 01/14/2022 M M M
Broad money 12/2021 01/14/2022 M M M
Central bank balance sheet 12/2021 01/14/2022 M M M
Consolidated balance sheet of the banking

12/2021 01/31/2022 M M M
system
Interest rates2 03/1/2022 03/1/2022 D D D
Consumer price index 01/2022 02/28/2022 M M M
Revenue, expenditure, balance and composition

2020 10/29/2021 A A A
of financing3—general government4
Revenue, expenditure, balance and composition

2021: Q3 11/30/2021 Q Q Q
of financing3—federal government
Stocks of central government and central

2021: Q3 11/30/2021 Q Q Q
government guaranteed debt5
External current account balance 2021: Q4 02/11/2022 Q Q Q
Exports and imports of goods 12/2021 01/21/2022 M M M
Exports and imports of services 2021: Q4 01/21/2022 Q Q Q
GDP/GNP 2021: Q4 02/11/2022 Q Q Q
Gross external debt 2021: Q4 02/11/2022 Q Q Q
International Investment Position 2021: Q4 02/11/2022 Q Q Q
1
Includes reserve assets pledged or otherwise encumbered as well as net derivative positions.
2
Both market-based and officially determined, including discount rates, money market rates, rates on treasury bills, notes, and
bonds.
3
Foreign, domestic bank, and domestic nonbank financing is only available on an annual basis.
4
The general government consists of the central government (budgetary funds, extra budgetary funds, and social security funds) and
state and local governments.
5
Including currency and maturity composition.
6
Daily (D), Weekly (W), Monthly (M), Quarterly (Q), Annually (A).

Statement by the Staff Representative on Malaysia
April 6, 2022
This staff statement provides updates on developments since the staff report was issued on
March 7, including the impact of the Ukraine-Russia conflict and the evolution of the
pandemic. The thrust of the staff appraisal remains valid.
1. While downside risks to the outlook for the Malaysian economy have been amplified
by the conflict in Ukraine, the eventual impact on the pace of the recovery is expected to be
moderate. The economy has limited direct exposures to Russia and Ukraine, with bilateral
goods trade with the two countries accounting for about ½ percent of GDP in 2021 and tourism
flows less than 1 percent of total flows. The resource-rich Malaysian economy could benefit
from the positive terms-of-trade effects driven by higher oil prices. However, this could be
weighed down by the negative spillovers from the conflict through the impact of higher food and
energy prices on domestic inflation, disruptions to supply chains, and weaker partner country
demand. The second-round impact on domestic inflation will be mitigated by the still-sizable
slack in the economy, with inflation expectations well anchored. On March 10, the Minister of
Finance announced that fuel subsidies could reach 1.7 percent of GDP in 2022 (more than double
the level in 2021) if oil prices remain above $100 per barrel for a prolonged period. The
additional subsidies will be financed by higher oil revenues with the net fiscal impact either
broadly neutral or slightly positive. Staff has revised the 2022 growth forecast downward to
5.6 percent from 5.7 percent in the staff report. Inflation is now projected to increase from 2.5 to
3 percent in 2022. The slightly revised baseline is broadly consistent with the main thrust of the
near-term outlook and the supporting policies that were discussed with the authorities.
2. Reflecting the expected moderate macroeconomic impact of the conflict, financial

market responses have been muted. The Malaysian Ringgit has been relatively stable and
remained at levels similar to those recorded before the invasion on February 24. While
Malaysian markets are pricing in a slightly higher short-term inflation risks, spot and, more
importantly, forward long-term bond yields are broadly unchanged, suggesting transitory
inflation pricing. The stock market held up supported by strong performance of commodity-
related stocks. A prolonged conflict could lead to major spike in global risk aversion and tighten
financial conditions in Malaysia, as in other EMs, and compound the spillovers. Nevertheless,
the resilience of Malaysia’s financial sector, supported by strong buffers in the banking sector
that were built pre-pandemic, would continue to underpin financial stability.
3. On the pandemic front, Malaysia is transitioning to an endemic phase of COVID-19

and is preparing to substantially relax border restrictions effective April 1. Even with the
increased case numbers caused recently by the Omicron variant, ICU utilization and fatality rates
remain relatively low, and well below the peak in 2021, supported by the government’s
impressive vaccination and booster program. With the improvement in pandemic risk factors,
Malaysia is moving toward an endemic phase, enabling businesses to operate at full capacity.
Effective April 1, fully vaccinated travelers will be able to travel without quarantine, while a 5-
day quarantine will be required for those who are not fully vaccinated. The planned reopening of
the borders is expected to provide a boost for the tourism industry and support the ongoing
economic recovery.
1
Statement by Rosemary Lim, Executive Director for Malaysia, Firman Mochtar,

Alternate Executive Director, and Tengku Muhammad Azlan Ariff, Advisor to the
Executive Director on Malaysia
April 6, 2022
Introduction
On behalf of our Malaysian authorities, we would like to convey our appreciation to the
mission team, led by Mission Chief Mr. Lamin Leigh, for the constructive 2022 Article IV
consultation and the comprehensive report.
Our authorities broadly agree with the thrust of staff’s appraisal and will carefully consider
the key policy recommendations. There is common understanding that macroeconomic
policies going forward will need to be calibrated to the pace of the recovery while preserving
policy space, given the uneven recovery and ongoing uncertainties surrounding the pandemic
trajectory. The stronger-than-expected recovery provides an opportunity to shift the overall
focus of policy towards longer-term structural reforms, balanced with the need to ensure that
immediate policy support remains for the more vulnerable segments of the economy.
Latest economic developments and outlook

Economic activity improved moderately in 2021 with GDP growth at 3.1 percent (2020: -5.6
percent). The recovery was supported by the rapid progress in domestic vaccinations1, and
phased lifting of restrictions under the National Recovery Plan (NRP) that contributed to a
gradual normalization in economic activity towards the end of the year. While headline
inflation saw an increase to 2.5 percent, this was driven mainly by the base effects from the
low retail fuel prices in 2020. Core inflation remained subdued, averaging at 0.7 percent
(2020: 1.1 percent), reflecting spare capacity in the economy, although it increased slightly
towards the end of the year, in line with the improved demand conditions.
The Malaysian economy is expected to improve further in 2022, with growth projected to
expand by between 5.3 to 6.3 percent, supported by the continued expansion in global
demand, the lifting of domestic containment measures, reopening of international borders
and further improvement in labor market conditions. Policy support for households and
businesses will remain in place and, while scaled down and more targeted, will also help
facilitate the recovery momentum and enable a more entrenched recovery in domestic
demand. Authorities project headline inflation in 2022 to remain manageable, averaging
between 2.2 to 3.2 percent, with core inflation expected to average higher, driven by the
improvement in demand conditions amid lingering cost pressures.
Our authorities agree with staff’s assessment that the balance of risks to the growth outlook
remains tilted to the downside, stemming mainly from COVID-19 related factors on both
1
Malaysia’s vaccination rate is among the highest in the world. As of March 31, 2022, 97.6 percent of the
adult population has been fully vaccinated, while 67.2 percent have received booster doses. Currently,
vaccines are also being rolled out to teenagers and children. Source:covidnow.moh.gov.my
2
the domestic and external fronts. Factors which pose upside risks to the growth outlook
include higher-than-expected global growth and stronger-than-expected improvement in
tourism-related sectors amid the reopening of international borders. Importantly, our
authorities recognize that the recovery remains uneven. Globally, the pandemic has had a
disproportionate impact across economic sectors, labor markets segments and income
groups. In Malaysia’s case, the authorities are paying close attention to developments
within adversely affected economic sectors (e.g., tourism), low-income households, SMEs
as well as the different labor market dimensions (e.g., age groups, gender, skills). In line
with this, policy support measures have been, and will continue to be, tailored and
targeted to these affected groups. To mitigate the impact of long-term economic scarring,
our authorities recognize the urgency, and is fully committed to implementing wide-
ranging structural reforms, as reflected in the various key reform initiatives announced over
the past year.
Our authorities’ macroeconomic management framework utilizes a broad range of policy
tools including monetary, fiscal, financial, prudential, and structural policies. This avoids the
overburdening of any single policy tool, increases policy complementarities while
minimizing the trade-offs, and allows the authorities to employ the right tools to address
different risks. In our view, being able to maintain policy flexibility has been critical to our
authorities’ effective policy responses in mitigating the lasting impact of the pandemic.
Fiscal policy
Our authorities agree with staff that additional and targeted fiscal support is warranted in
the near-term and are committed to providing adequate fiscal support until the economic
recovery has firmly taken hold. This is reflected in the expansionary Budget 2022, which is
the largest budget to date with an allocation of RM332.1 billion or 20.3 percent of GDP,
geared towards near-term economic revitalization efforts, as well as catalyzing structural
reform strategies as envisioned in the Twelfth Malaysia Plan, 2021-2025 (12MP). An
additional RM23 billion or 1.4 percent of GDP was dedicated to the COVID-19 Fund for
stimulus and economic recovery measures allocated through targeted cash assistance, wage
subsidies, grants for SMEs, re-skilling and upskilling programs and other measures. The
Federal Government’s statutory debt limit was also raised from 60 to 65 percent of GDP in
October 2021 to provide the fiscal space to facilitate the implementation of existing stimulus
measures and the financing requirement for the 12MP.
Despite the expansionary fiscal policy to finance recovery measures, our authorities remain
fully committed to medium-term fiscal consolidation. Fiscal strategy will beguided by the
Medium-Term Fiscal Framework (MTFF), which serves as guidance for budgetary planning
by setting a three-year macro-fiscal projection, including for revenue and expenditure. Our
authorities view that a gradual and careful fiscal consolidation could commence in 2022
instead of 2023 as proposed by staff, to begin the process of rebuilding policy space for
future shocks. Nevertheless, to maintain agility and flexibility in providing the necessary
fiscal support during these uncertain times, the 2022 - 2024 MTFF has been revised with a
3
more gradual fiscal consolidation than initially projected, with the overall fiscal deficit
averaging at 5 percent of GDP for the three-year period (2021 – 2023 MTFF: 4.5 percent). In
line with this, the fiscal deficit is projected to decline to 6 percent of GDP in 2022 (2021: 6.5
percent) and 3.5 percent in the medium-term. Our authorities also aim to reduce the overall
debt-to-GDP ratio to below 60 percent in the medium-term.
Fiscal sustainability remains a key priority and the Budget 2022 reflects the authorities’
strong resolve for bold and effective reforms to strengthen public finances and enhance
public financial management. To further enhance governance, accountability and
transparency in fiscal management, the Fiscal Responsibility Act (FRA), which also includes
some of staff’s recommendations via technical assistance, is expected to be tabled to the
Parliament this year. Enhancing the revenue base will be guided by the Medium-Term
Revenue Strategy (MTRS). While some revenue enhancement measures in line with the
MTRS were already announced in Budget 2022, others are in the pipeline, including
feasibility studies on capital gains, value added and carbon taxes. On the expenditure
side, a Tax Expenditure Statement will be published to determine the costs incurred by the
Government in providing tax incentives, one-off exemptions and other tax policies. The
Government is also collaborating with the World Bank in conducting a Public Expenditure
Review to ensure efficiency and effectiveness of public spending.
The authorities remain steadfast in undertaking other ongoing reforms to support sound
public financial management, including through strengthening the ecosystem and governance
structure of government-linked companies (GLCs) and government-linked investment
companies (GLICs), and continuing their progress with implementing initiatives under the
National Anti-Corruption Plan (NACP).
Monetary, exchange rate and financial market policies

Authorities welcome staff’s assessment that Malaysia’s monetary policy stance is
appropriate. Monetary policy remained accommodative in 2021, with Bank Negara Malaysia
(BNM) keeping the Overnight Policy Rate (OPR) unchanged at the historical low of 1.75
percent throughout the year, amid the relatively modest outlook on inflation and limited risks
to financial imbalances. Monetary policy was also complemented with other targeted
financial policies that were better tailored to provide support to segments of the economy that
were experiencing an uneven recovery.2
In line with the accommodative monetary policy, BNM’s monetary operations continued to
ensure conducive domestic liquidity conditions, the orderly functioning of domestic financial
markets and continued intermediation activity to the real economy. Domestic banking system
liquidity remained ample. The extension of the Statutory ReserveRequirement (SRR)
2
This includes repayment assistance (including loan moratoria), made available to all individuals,
microenterprises and affected SMEs, additional allocation to existing facilities under BNM’s Fund for SMEs to
provide relief for and support the recovery of SMEs in the services sector and allowing SMEs to utilize part of
these financing proceeds to repay existing business loans.
4
flexibility provided sustained liquidity support.3 BNM also conducted liquidity injection
operations through various instruments including reverse repos, outright purchase of
Government securities and foreign exchange swaps to ensure orderly market conditions
during intermittent periods of heightened volatility.
Monetary policy decisions will continue to be data-driven and guided by the evolving
balance of risks surrounding the outlook for domestic growth and inflation. On March 3,
2022, the Monetary Policy Committee (MPC) of BNM decided to maintain the OPR at
1.75 percent, which they deem as accommodative and appropriate. Considerations for
continued monetary policy support would also be balanced against risks of a potential build-
up in financial imbalances. Any potential adjustments to the degree of monetary
accommodation would be made in a measured and gradual manner, while being mindful of
avoiding a premature withdrawal of policy support that could risk jeopardizing the economic
recovery.
The flexibility of the exchange rate continues to be the first line of defense, serving as a
shock absorber for the economy. BNM’s foreign exchange intervention (FXI) activities
remain solely targeted at managing excessive exchange rate volatility and maintaining
orderly domestic foreign exchange (FX) market conditions. This is in line with staff’s
assessment that Malaysia’s de-facto exchange rate arrangement remains classified as
floating.
In addition, initiatives to liberalize Malaysia’s foreign exchange policy (FEP) and deepen the
domestic FX market have been ongoing. Despite differences in views over the Fund’s CFM
taxonomy, staff noted that many FEP liberalization measures undertaken by the authorities
within the past year were considered an easing in CFMs. The authorities view that
remaining FX market and prudential measures continue to be crucial for financial
stability as well as the development of the domestic FX market, and therefore disagree with
staff’s recommendation to gradually phase out these measures at this stage. They also caution
that any exit strategy would need to be undertaken carefully, giving due regard to the
prevailing risks and potential impact on the domestic FX market. On the publication of FXI
data, our authorities continue to consider the various trade-offs including concerns over the
confidential and market sensitive nature of the data, which could lead to speculative
activities and hinder the effectiveness of FXI operations.
Malaysia’s current account (CA) surplus is generally seen as a sign of strength for the
economy, especially in a highly uncertain environment. Therefore, it is important that the
EBA findings are interpreted with the domestic context in mind and to remain focused on the
explanations and nuances behind the drivers of the CA balance rather than just rely on the
results of the model. We, and our authorities, continue to see limitations in the EBA model,
given the weak explanatory power of the model in the context of Malaysia, even with the
inclusion of adjustors. On external debt sustainability,our authorities view that the current
3
The flexibility was provided for banking institutions to recognize Malaysian Government Securities (MGS)
and Malaysian Government Investment Issues (MGII) as part of SRR compliance. This SRR flexibility was
initially available until May 31, 2021, and subsequently extended to December 31, 2022.
5
level of external debt remains manageable in the presence of mitigating factors, as

highlighted in the staff report.
Financial sector
Domestic financial stability remains firmly supported by a resilient financial sector,which
continues to maintain sufficient financial buffers. Banks continued to prudently set aside
buffers for potential credit losses in anticipation of a deterioration in asset quality as
repayment assistance programs are gradually unwound. While the credit risk outlook remains
challenging due to ongoing pandemic-related uncertainties, any risks of a material increase in
impairments remain manageable. In addition, results from BNM’s latest macro stress test
affirm that banks can continue to withstand potential losses from severe macroeconomic
and financial shocks, while sustaining support for economic recovery.
Risks from the household sector are assessed to be contained. Household debt-to-GDP ratio,
while elevated, has declined slightly to 89.0 percent as at end-2021. Our authorities disagree
with staff’s use of the term ‘household debt overhang’ to characterize household debt, which
implies that high indebtedness has resulted in the household sector being unable to take on
more debt. There is limited evidence that households are currently experiencing a debt
overhang. Households across all income groups continue to experience steady flow of credit,
with household debt growing at 4.1 percent in 2021. Bank lending continues to be
underpinned by sound and prudent underwriting standards and loan affordability
assessments. Household borrowers, on aggregate, have also maintained ample financial
buffers at least twice the size of their debt. The improving economic outlook and
employment prospects are expected to support overall household resilience. Nevertheless,
borrowers who are highly leveraged and have low financial buffers, particularly from the
lower-income group, warrant closer attention. Importantly for these groups, assistance
remains available for individuals still experiencing financial distress. These include efforts by
banks and the Credit Counselling and Debt Management Agency (AKPK) to offer
personalized and holistic support such as the Financial Management and Resilience
Programme (URUS) for the bottom 50 percent of the household income distribution. Banks
also stand ready and are committed to offer tailored repayment assistance packages to
distressed borrowers.
Our authorities agree with staff for continued targeted support to businesses, especially for
the more vulnerable SMEs. While non-financial corporates have generally experienced
improved financial performance and the share of firms-at-risk has declined, SMEs are more
vulnerable given their smaller cash buffers and thinner profit margins. It should be noted,
however, that new rescheduling and restructuring (R&R) applications by SMEs have
decelerated from its peak in July 2021, indicating greater confidence among SMEs of their
ability to service debt. Leading indicators by banks also reflect a recovery, as loans with
increased credit risk grew at a slower pace. BNM has recently announced additional funds
for SMEs, comprising additional allocations to the existing Fund for SMEs (e.g., Targeted
Relief and Recovery Facility, TRRF) and the creation of two new funds to support SME
6
business recapitalization and transition of SMEs towards more sustainable and low carbon
practices. The TRRF was further enhanced to allow SMEs to utilize up to 30 percent of the
financing approved to repay existing business financing. Existing credit guarantee schemes
and on-going R&R by banks will also support business recovery and mitigate risks of a
significant rise in impairments.
Structural and governance reforms

Our authorities are firmly committed to structural and institutional reforms as being the key
focus of policies to enhance economic dynamism, mitigate the impact of scarring from the
pandemic, and secure sustainable and inclusive growth in the medium- to long-term. Several
transformational agendas would anchor Malaysia’s initiatives to, among others, reinvigorate
economic growth, narrow existing socioeconomic disparities, strengthen social safety nets,
accelerate the adoption of technology and innovation and transition towards a greener, more
climate-resilient economy.
Progress continues to be made on 12MP priorities. The Government’s Budget 2022 is aligned
to the 12MP framework, with significant allocations contributing towards, for example,
raising the quality of education, strengthening the labor market support system, expanding
social protection, and moving towards a more sustainable economy. The adoption of National
Investment Aspirations (NIA) into national strategies and the ongoing policy reforms under
the New Investment Policy would accelerate the realization of quality investments in the
future. The Malaysia Digital Economic Blueprint (MyDIGITAL) was launched last year to
catalyze the new growth areas under Malaysia’s digital economy and enable greater digital
inclusiveness across the nation. BNM had also recently published the Financial Sector
Blueprint 2022-2026 (FSB), charting the agenda for the financial sector, of which key thrusts
include elevating the well-being of households and businesses, advancing digitalization of
the financial sector, and positioning the financial system to facilitate an orderly transition to a
greener economy.
On advancing green and climate initiatives, the 12MP has reaffirmed Malaysia’s aspiration to
achieve net zero carbon emissions by 2050, supported by strong public- private sector
collaboration. The Ministry of Environment and Water Malaysia is currently developing the
Long-Term Low Emission Development Strategy which is targeted to be finalized by end-
2022. Currently, Malaysia has updated the Nationally Determined Contribution (NDC) to
reduce carbon emissions by 45 percent compared to 35 percent, by driving the NDC roadmap
implementation until 2030, in alignment with the commitments made under the Paris
Agreement. The Government is also undertaking a feasibility study of introducing a carbon
tax. Regarding the financial sector, BNM plans to integrate climate-related and
environmental risks in prudential regulation and supervision, including stress-testing
requirements. BNM also issued the Climate Change and Principles-based Taxonomy in April
2021, which aims to facilitate consistent assessments of economic activities and their
associated impacts on the climate and broader environment. Climate-related risk disclosures
will also be made mandatory for all banks.
7
Efforts to strengthen governance and the AML/CFT framework remain a key priority for our
authorities and will be accelerated. Eight out of the 82 initiatives outlined in the mid- term
review of the NACP 2019-2023 have been successfully implemented. Another 14 initiatives
are expected to be implemented by mid-2022, with the commitment to implement more
NACP initiatives throughout the year. Our authorities remain committed to drive a robust
national AML/CFT regime and have set out medium-term priorities for preserving the
integrity of the financial system in the FSB, which will continue to build on the established
collaboration mechanisms, while targeting mitigation of the ML/TF risks identified in the
recently concluded National Risk Assessment 2020.
Final Remarks
The Malaysian authorities remain committed to sound macroeconomic management and
continued structural reforms, which has served the economy well and is reflected by the good
performance track record of the Malaysian economy, and its continued resilience towards
adverse shocks. Going forward, our authorities look forward to continued engagement and
strong collaboration with the Fund, including through ongoing and future technical assistance
programs.

IMF Article 4

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

IMF Article 4

Uploaded by

Copyright:

Available Formats

IMF Country Report No.

• An Informational Annex prepared by the IMF staff.

• A Staff Statement updating information on recent developments.

• A Statement by the Executive Director for Malaysia.

Copies of this report are available to the public from

International Monetary Fund • Publication Services

International Monetary Fund

© 2022 International Monetary Fund

IMF Executive Board Concludes 2022 Article IV Consultation

Executive Board Assessment2

Executive Directors welcomed the gradual economic recovery supported by impressive

CONTEXT: MALAYSIA NAVIGATING A MULTI-SPEED GLOBAL RECOVERY ___________________ 4

RECENT DEVELOPMENTS: A STEADY BUT UNBALANCED RECOVERY_________________________ 5

POLICY DISCUSSIONS: CALIBRATING MACRO POLICIES TO THE PACE OF THE RECOVERY

STAFF APPRAISAL ______________________________________________________________________________ 17

2 INTERNATIONAL MONETARY FUND

8. Financial Soundness Indicators______________________________________________________________ 26

INTERNATIONAL MONETARY FUND 3

CONTEXT: MALAYSIA NAVIGATING A MULTI-SPEED

4 INTERNATIONAL MONETARY FUND

RECENT DEVELOPMENTS: A STEADY BUT

INTERNATIONAL MONETARY FUND 5

6 INTERNATIONAL MONETARY FUND

9. Malaysia’s external position in 2021 is preliminarily assessed to have been moderately

OUTLOOK: SOLID GROWTH WITH LINGERING

INTERNATIONAL MONETARY FUND 7

12. Downside risks dominate the outlook (GRAM—Appendix VI).

represents considerable risks to SMEs, workers in contact- 0.48 0.48

intensive sectors, low-skilled workers, and those in the 0.44 0.44

informal sector. Pandemic-related loss of schooling in low- 0.42 0.42

income and vulnerable households, estimated by the 0.38 0.38

World Bank at 1.3 years, could also lead to a permanent 0.36

8 INTERNATIONAL MONETARY FUND

POLICY DISCUSSIONS: CALIBRATING MACRO POLICIES

A. Fiscal Policy: Sustaining Recovery, Minimizing Scarring, Rebuilding

INTERNATIONAL MONETARY FUND 9

18. Embarking on the medium-term revenue strategy (MTRS) is an urgent priority.

10 INTERNATIONAL MONETARY FUND

Structural Primary Balance Federal Government Debt

50 Model Advice Baseline Staff Advice

-1 Favorable debt dynamics: high share of debt: High contingent liabilities

Text Table. Malaysia: Fiscal Path: Baseline vs. Staff Recommendation

Overall Deficit to GDP

INTERNATIONAL MONETARY FUND 11

B. Monetary and Exchange Rates Policies: Transitioning to Policy

12 INTERNATIONAL MONETARY FUND

INTERNATIONAL MONETARY FUND 13

C. Financial Sector Policies: Safeguarding Stability

14 INTERNATIONAL MONETARY FUND

D. Structural Policies: The Post-Pandemic Transition—Promoting Inclusive

INTERNATIONAL MONETARY FUND 15

16 INTERNATIONAL MONETARY FUND

E. Integrating Surveillance Advice and Capacity Development Support

CD priorities Surveillance Advice

INTERNATIONAL MONETARY FUND 17

18 INTERNATIONAL MONETARY FUND

Figure 1. Malaysia: Growth and Exports

INTERNATIONAL MONETARY FUND 19

Figure 2. Malaysia: Inflation and Domestic Resource Constraints

Producer prices increased reflecting a rebound in global

20 INTERNATIONAL MONETARY FUND

Figure 3. Malaysia: Monetary Developments

Demand deposits and currency in circulation have picked

... while financial conditions have eased since the significant